Children and Empathy

My two-and-a-half year old is a very sweet child and he appears to be aware of his emotions.  I read somewhere that young children are not developmentally capable of empathy, but this does not appear to be the case with Ikaika. 

The other day we were down in Kona and I took the boys to Target.  Ikaika was walking next to the cart and I saw him playing with my wallet (which had been laying in the basket) and, stupid me, I didn't think to take it away from him.  When the time came to approach the checkout line I noticed that my wallet was not in the cart.  Or my purse.  Or Ikaika's hands!  ARRG!!!!

We ended up walking back though the entire store looking for this wallet (which I bought from Target so I was super worried about it getting restocked on accident - I think the tag is still on it, too)  Eventually, I discovered that it had been turned into a customer service and I got it back - with all my stuff in it, no less.  God bless the Land of Aloha!

I had been upset with Ikaika and had scolded him, telling him how angry I was and afraid that my wallet was missing.  We can't leave without it, I can't drive or pay for anything without, etc.  He watched quietly and said the perfunctory, "sorry, mommy" a few times.  When we were back in the car, after the whole ordeal was over, he was being quiet and finally said to me in a small voice, "mommy, I upset."
"Why are you upset, sweetheart?"
"Because I lose mommy wallet"
"Oh, honey, that's alright.  We found it and I shouldn't have let you play with it in the first place.  Next time we are in the store I'm going to keep it in my purse so you don't forget it."
"Oh..."
Silence.
"Mommy, I sorry."
"I forgive you, honey."

There were about two hours left in our day and he brought up the wallet story and apologized at least four more times.  I think the best part of that entire interaction, for me, was the fact that he was able to identify his emotions (i'm upset) and say why he felt that way.  I feel like one of the biggest sources of conflict, esp between Mr A and myself, is not being able to honestly talk about the way you feel and why.  So instead of saying "I'm hurt, I'm afraid, etc" and then talking about that, we just get angry with ourselves or others.  I want to teach my children to recognize and talk about the way they feel, that way they aren't redirecting those emotions in weird unhealthy ways.

Ikaika has a range of emotions that he recognizes (angry, hurt, sad, upset, frustrated, etc) and can express.  Usually if he's freaking out and crying, asking him what's the matter and why will calm him down somewhat.  He's also able to pick up on the emotions of others (for example, me being upset in Target) and respond to that (apologizing, talking to me about it, etc.)  I wouldn't describe him as a deep thinker or an emotionally complex child, but I would say that he's at least aware of his feelings and, on occasion, the feelings of others.