KEY DATA: CPI: +0.4%; Excluding Food and Energy: +0.3%/Real Earnings: -0.2%/Starts: -6.5%; Permits: -6.4%

IN A NUTSHELL:  “Rising consumer prices continue to sap consumer spending power and that is not helping the housing market either.”

WHAT IT MEANS: I’ll admit that I am an optimist about the economy.  I believe that growth is strong enough to create the tight labor conditions that will cause wages to rise and the economy to surge.  But the pathway to nirvana remains slow.  Consumer prices jumped in May and it wasn’t all energy or food, which were up sharply.  Costs of a variety of services such as shelter, medical care and transportation also increased.  On the positive side, most non-food or energy commodity prices were well contained, so consumers had at least some respite from the insidious costs of inflation. That said, the jump in consumer prices, coupled with more modest gains in earnings meant that consumer spending power went down again.  Since May 2013, real weekly earnings have declined, yes declined, by 0.1%.  Any further questions about why the economy is not growing rapidly?   “The fault, dear business community, is not at the Fed or in Washington, but it is in ourselves, that we don’t pay our underlings”. (My apologies to Shakespeare and Cassius.)

As for the housing market, it took a bit of a step backward in May as housing starts moderated.  That said, the pace of construction so far this quarter is up by double-digits over the weather restrained first quarter total, so housing should add to growth, possibly significantly.  Permits were off as well, but they had been running well above the start rate for most of the year and now they are more closely aligned.  Continued increases in the number of homes under construction raises a warning that additional gains in starts may be limited unless sales pick up a lot.

MARKETS AND FED POLICY IMPLICATIONS: These were not reports that anyone was hoping for.  Indeed, it would have been nice if inflation was more moderate and construction was more robust, but that just was not the case in May.  I am not that worried about the housing sector, as conditions seem to be moving forward, though hardly at a breakneck pace.  It is inflation that concerns me.  The Fed has been not been overly worried about inflation, except to note it is below target and expectation are stable.  The issue is spending power, which remains the missing link in the recovery.  Softer wholesale food prices hold out hope that consumer prices may moderate but Iraq is hardly helpful when it comes to energy costs.  With that as a background, the Fed is meeting and will have to figure out what is happening.  Tomorrow’s statement, projections and press conference should be very interesting.