This morning's inflation report confirmed that inflation is firming, at least for now. Though people don't like to hear this, when you exclude food and energy, inflation is lower than the headline figure, but core inflation is still 2%, the highest in recent years. Unlike last year, there are no signs of potential deflation for the foreseeable future. This should reduce the likelihood of Fed easing at it's next meeting next week. By the way, why look at core inflation instead of overall inflation? Gas prices have dropped since the data for the report was collected, which should lead to lower inflation next month. Fruit and vegetable prices spiked in the 3 months ended in February, declined over the next 3 months and rose significantly again between May and August. That led to higher inflation early in the year, less inflation in the Spring and more in the summer (even including seasonal adjustments). Over time, headline inflation is the figure to watch, but it tends to be distorted in the short term by the volatility in the prices of certain products.
Meanwhile, new claims for unemployment rose, signaling continued weakness in the jobs market. Given the weakness in the job market and higher inflation, real weekly earnings declined by 0.8% in August and is now down by 2.2% since it's recent peak in October 2010. Clearly, weakness in the job market along with weak earnings will continue to put pressure on consumer spending, contributing to continued economic weakness into 2012.