Cushing, OK, delivered what it could for the CPI. The contribution to the inflation rate from oil prices was again substantial in August 2018. The energy component of the index gained 10.3% year-over-year, compared to 11.9% in July. It was the fourth straight month of double-digit gains.

Yet, the CPI headline retreated a little further than expected. After reaching the highest since December 2011 the month before, 2.95%, in August overall consumer prices were up 2.70%. Most of the deceleration was in the so-called core components.

The big problem for Jay Powell as he attempts to make his “rate hike” case is not that the CPI has reached this high after years upon years of undershooting. It’s really whether or not the economy is as he says it is to keep it there. If for the second time in as many years consumer prices trace little more than WTI, then it undercuts his whole argument at a very crucial moment (eurodollar futures inversion, rising downside risks).

This is really two problems rolled into a single concept – the Phillips Curve. By betting on the CPI (as the PCE Deflator’s more buoyant sibling), the FOMC is likewise gambling on the unemployment rate. At 4% or less for several months now in a row, something other than crude oil had better start showing up in consumer prices.

The wage pressures that the Phillips Curve demands an accurate unemployment rate this low cannot remain absent for long. If they don’t happen soon, it can only be that the unemployment rate is wrong and therefore the whole economic narrative falls apart.

Again.

Even where it should be right now, there isn’t any hint of accelerating prices outside of energy. The CPI’s most flexible basket items were up by a little more than 4% in July, like the headline the fastest rate since 2011. But, as you can plainly see above, 4% in flexible prices is still way, way below conditions consistent with an inflationary tailwind (for Economists; it’s actually a headwind for consumers).