Where's the Inflation??? Well, just wait...

Yes, the economy is for the moment on solid footing. Hence the Fed's recent rate hikes and signaling that they're ready to reduce the monster of a balance sheet (treasuries and mortgage backed securities) they grew as they saved the free world (a little sarcasm there).

But where the heck is the inflation??? While inflation to some is a dirty word, it is indeed what the Fed would love to see a bit more of right about now. In theory, rising prices (to a point) inspire rising consumption (as there'd be no signal to wait for lower prices), and, thus, they'd inspire higher production as well. A phenomenon that would allow the Fed to then tap the breaks (raise rates further) a little harder -- as too much of a presumably good thing (inflation) can lead to various and sundry bad things (remember the late-70s, early 80s). Plus, the Fed sorely needs to build up some ammunition to adequately arm themselves for battle with the inevitable next recession.

Problem is, prices aren't cooperating! Last month's Producer Price Index actually declined 0.1% (against a consensus expectation of +0.1%) and the Consumer Price Index rose a mere 0.1% (against expectations of +0.2%). 

So, once again, you ask, if the economy's so good, how come prices aren't rising in response?? Great question! If you're right in your assertion that "the economy's so good", the answer then has to be "just wait".

My perusal of last month's NFIB Small Business Survey inspired this blog post. Being that small business owners employ two-thirds of America's workforce, we need to take what they say very seriously. And what they say about labor conditions suggests that they'll be having to raise (inflate) wages going forward if they're to attract the qualified workers they so sorely need. That's a higher expense that we should presume will ultimately get passed on to the consumer.

click to enlarge...