• INDICATOR: September Consumer Prices, Earnings and October Home Builders Index
• KEY DATA: CPI: +0.3%; Less Energy: +0.1%/ Real Earnings: -0.1%/ NAHB: -2 points
• IN A NUTSHELL: “Inflation may be slowly accelerating, but it is also cutting into consumer spending power.”

WHAT IT MEANS: The Fed members are wishing and hoping (and thinking and praying – sorry Dusty) that inflation will start approaching their target of 2%. That could happen this year, but largely because of the rise in energy costs, not a generalized increase in consumer prices. The Consumer Price Index rose solidly in September, led by sharp increases in energy commodities. Gasoline, fuel oil, natural gas and electricity prices all jumped. In addition, shelter costs continue to soar, medical commodity prices are up and if you eat out, it is costing a lot more as well. On the other hand, if you are buying a vehicle, new or used, prices are going nowhere or even down. And the cost of eating at home is also falling. Over the year, the CPI has not yet reached the Fed’s target, though excluding food and energy, it has been there for ten months now.

While the Fed may think higher inflation is good, I doubt that most households would agree. With wages still rising modestly, the acceleration in inflation is cutting into the spending power of workers. Adjusting for prices, hourly earnings declined in September and have been on a decelerating trend since January 2015. That will not generate stronger consumer spending or growth.

The National Association of Home Builders’ Housing Market Index declined in October, but don’t take that as a weakening in the housing market. There was a sharp rise in September (due to an outsized gain in the West) and the modest October reversal gets us to a more realistic level. That said, the national level is still high, indicating the housing market is in good shape in all regions except maybe the Northeast.

MARKETS AND FED POLICY IMPLICATIONS: Housing is in good shape, inflation is on a slow but steady upward trend and job gains are decent. So, what is the Fed waiting for? I am sure they would like to see a report where inflation is near or even above their target, but that may not happen before the last FOMC meeting of the year. October is when energy costs should turn flat from the year before. They are likely to add to inflation afterward. Unfortunately for the Fed, the November CPI report comes out after the meeting. Also, the Fed’s preferred measure, the Personal Consumption Expenditure price index is running a little cooler than the CPI and it may take a longer for that index to break the 2% barrier. So, the Fed members will have to fudge it if they are to say the data support an increase, which I still think is likely in December. As for investors, as long as earnings are good, they will worry about the economy later, such as after the election – which cannot come soon enough.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.