INDICATOR: January Consumer Prices and Real Earnings

KEY DATA: CPI: 0%; Over-year: 1.6%; Ex-Food and Energy: +0.2%; Over-Year: +2.2%/ Real Hourly Earnings: +0.2%; Over-Year: 1.7%

IN A NUTSHELL: “Household spending power is benefitting from the drop in energy costs, but don’t count on that continuing.”

WHAT IT MEANS: The Fed, or shall I say Chair Powell, has indicated that inflation will be a prime factor in deciding what to do about rates. Of course, that is not unusual, as stable inflation is one of the Fed’s dual mandates. Right now, inflation is indeed stable. Household costs were flat in January as gasoline prices cratered. Since it appears that gasoline costs are now moving upward slowly, that positive impact may be over. The other volatile component, food, is rising faster, especially at restaurants. Supermarkets costs are more stable. Excluding those factors, the core index was up moderately and the rise over the year has been fairly stable for much of the last six months. Looking at other details, housing costs continue to rise sharply but the increases in used vehicles are fading. Prescription costs have stabilized, though the government may be the only group seeing that, while medical services costs keep rising solidly. Still, when you add them together, medical costs are not a factor driving up inflation, at least that is what the government says. And the government claims that airline prices are dropping. Really? I have tried booking flights recently and the costs compared to last year are way up. I guess it is just me.

With inflation flat and hourly wages rising decently, real – or inflation adjusted – earnings rose solidly in January. The gain over the year is increasing and it is approaching a more respectable 2%. It had been closer to 1% just a few months ago. But before anyone starts thinking that consumer purchasing power is finally getting back to decent levels, remember that much of the increase came from the drop in energy costs. In 2015, when energy prices cratered, real earnings soared as well, only to come crashing down when more normal prices returned. While I don’t think we will see any major rise in energy prices, look for the surge in inflation-adjusted hourly wages to fade back toward the unacceptably low 1% range.

MARKETS AND FED POLICY IMPLICATIONS: We are beginning to get back to a more normal calendar of economic indicators, but we will not get the first reading of GDP for two more weeks. The Fed has little to talk about until that report is released. In the interim, Mr. Powell can note that inflation is running around desired levels and that is good. He will not have to consider rethinking his thinking on rate hikes for a while, especially given the reasonably tame nature of inflation. As for investors, it is still all about trade, which it should be. That is the one real risk to economic growth. The messages coming out of Washington seem to imply that any agreement with China, puff or not, will not come soon. So expect volatility to continue. But most importantly, spring training is starting. Once the Phillies sign Harper (my personal preference), it will be time to dream of fun nights at the ballpark when it is actually warm, whatever that is.

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