The pickle for the BoE is that inflation is too high but growth is not soft enough to bring it down durably. Another datapoint today showing UK meh growth, but even zero is just not weak enough given the employment and inflation data we are seeing.

Main Street is making it clear they are feeling the pain of inflation remaining too high. From their perspective certainly looks like the Fed has a lot more work to do.

And when you look at the concerns measures and the hard data the read is pretty clear. Inflation is too high. Growth is fine. Labor markets are tight. Wages are rising at the fastest pace in decades. That’s all in line with the other macro data we see.

A lot is always made of the sentiment measures for NFIB which as shown above are a big driver of the overall index. Like many sentiment surveys, there are likely other drivers influencing the outcomes. Much more accurate to stick to the ‘hard’ data reads.

Small banks are some of the biggest providers of credit to these biz, so instead of looking at the credit conditions measure I generally like looking at the actual credit creation data. Small bank lending if anything looks to be improving in recent weeks:

Credit conditions measures will also get a lot of ink around here and they have softened modestly as you’d expect given the sloos, etc. Certainly not suggesting a big collapse post-svb.

The result of that is that *actual* compensation measures also remain well above previous cycle peaks. This is consistent with the elevated nominal wage growth we are seeing in other measures.

Actual employment reads provide a good indication of the coincident sentiment of many of these biz. Hiring demand has stabilized well above previous cycle tops, reflecting strong labor market dynamics.

The NFIB survey covers essentially half the economy with a great amount of detail. While the headline numbers will get a lot of ink, when you look under the hood, it’s clear that *actual* conditions remain ok. Hard data (tracked cycle well) still indicate moderate expansion:

For a Fed running policy for Main Street the priority is clear: inflation is too high. Today’s NFIB shows small biz biggest concerns are 1) inflation and 2) difficulty getting good labor. These biz need the Fed to do more. Those “ex-XYZ” inflation reads just aren’t cutting it.

*ps non-core parts of inflation doesn’t really work this way because the things in there are globally priced and limited flexibility in real demand terms. You kinda eat and drive as much as you have to. Typically very high or low months px are met with saving and dissaving.

That’s what folks who have experienced inflationary cycles have seen back then. And what places like the UK and EUR are experiencing today. It’s why core inflation keeps surprising on the upside there (and in the US too).

So the next time you read an “ex-XYZ” read today think hard about whether that’s predictive or an attribution of the past.

Nominal income growth is 5-6pct. Productivity is zero on an economy wide level. That’s the issue, not nuanced sector specific supply constraints. Until that’s resolved there will not be a durable decline in prices.

Many people focused on services ex housing falling today, but how many more that core goods have surged! Or maybe housing will slow down in price terms but if that’s true (which will take awhile) folks will just have more money to spend on other stuff.

For example if airline ticket prices fall this month then that spending will just move over to spending more on hotels, or used cars, or some other thing. The liquidity of nominal spending just moves from one place to another.

Many folks will focus today on the “ex-XYZ” categories to understand future trends in inflation. But that doesn’t tell you how things will play out because product supply isn’t the primary constraint. Instead there is too much spending overall.

In an environment where elevated nominal income (not supply shocks) is driving inflation it is misleading to focus on subsets of core inflation. Nominal income growth is elevated relative to the productive capacity growth. When prices fall in one area they creep up in another.

The last cycle where we saw core inflation consistently at 5%, short rates peaked above 10%.

Before I get all the "its all lagging housing prices." OER/Rents have been stable at 6pct over the last 3 months, only a touch above overall core CPI. OER/Rent has actually come down from 9-10 to 6pct and core has remained stable this year. Means other sectors have picked up.

Cut through the noise. Core inflation has been stable at 5% annualized over the last 6 months. That is far too high given the Fed’s mandate.

@MichaelKantro Good chart!

The UK is a useful leading case study for others to see how this cycle will work if monetary policy is continuously a step or two behind the macro conditions. The answer is that inflation becomes more entrenched as we see today and H4L becomes the most likely path:

Once wage growth gets started it is very hard to slow it while labor markets remain tight. Today’s data shows that even with a tad softer overall growth, unemployment rates remain at secular lows. Significantly more pain will be needed to ease wage pressures.