Telltale signs of inflation percolation, and nobody is watching

Like the frog that’s taking a warm bath, but doesn’t know he’s actually the frog soup, inflation is percolating throughout the economy. Businesses are passing on cost increases to consumers, which I have documented in prior blogs and tweets. The tight labor market is causing some pressure on wages, increasing pay for certain industries (technology in particular). The core Consumer Price Index (CPI) rose to 2.4% in July, its largest value since September 2008.

Meanwhile, consumer spending has increased every month this year since March, an indicator of consumer confidence. Consumer confidence, an index measured and reported by the University of Michigan, has risen 4.8% since last year. The economy has been very strong, and seems to be getting stronger. This is also borne out in the GDP numbers from last quarter, which at 4.1% or 4.2% (original and revised numbers) was the highest value in the last four years.

Another reflection of the economy is the stock market. All three major indexes for the market (the Dow 30, the S&P 500, and the NASDAQ 100), are at or near all-time highs. The NASDAQ broke through the 8000 level for the first time in history. The S&P cleared the 2900 mark, another all-time high. The Dow broached 26,000 again, only 600 points from its January peak. All this has consumers in a jolly mood, and thinking things are going great.

However, when the party is going this well, it is the Fed’s responsibility to “take away the punch bowl” – or risk allowing inflation to get out of hand. Chairman Powell passed on raising rates at the last Fed meeting in July, but it is assumed that he will not do so in September or at the end of the year (the Fed is expected to raise rates two more times this year). At least, let’s hope so, because the inflation water is percolating and will soon be coming to a boil. All the while, all of those unprepared frogs are just taking a bath.