KEY DATA: CPI: +0.1%; Excluding Food and Energy: +0.3%/ Real Earnings: 0.0%; Year-over-Year: +2.3%

IN A NUTSHELL: “The only downward price pressures were in food and energy and gasoline prices have already turned, so all that is left is food.”

WHAT IT MEANS: Inflation has been a non-starter for a long time but it seems to be starting up again. The Consumer Price Index rose modestly in April, but the details tell a different story. About the only places where prices declined were in energy, including gasoline, and airline fares. I don’t know where the government gets its airline fares from but I haven’t seen any declines in my travels. As for energy, we all know that prices at the pump have jumped and the decline in natural gas costs also seems to be over. So, expect a strong rise in this component next month. Food prices were flat, but there are contradictory factors at work in this sector. Imported food costs are down but avian flu is driving up egg prices. Food may continue to restrain the overall index for a while, but not by much. As for other categories, the cost of services continues to rise solidly, led by shelter and medical care expenses. Those two categories make up almost 40% of the index and there is every reason to think that solid increases will be sustained. Vehicle prices are also rising and with demand solid, that should continue as well.

The modest rise in overall consumer prices kept worker incomes, adjusted for inflation, from falling in April. Over the year, incomes are up decently and the gains are slowly accelerating. That is good but not great news for workers.

MARKETS AND FED POLICY IMPLICATIONS: While inflation is not a major concern, the pattern of prices is changing. It used to be hard to find any category where costs were going up but now the opposite is true: Most categories are posting increases.   Inflation is rising in the services component and only some commodity price declines are keeping consumer prices from rising more strongly. This report is decent enough that the Fed doesn’t have to say that inflation is too low anymore. Of course, it is the Personal Consumption Expenditure deflator, not the Consumer Price Index that the Fed watches, and that is running a little cooler. But they trend together, so don’t be surprised if the Fed’s benchmark inflation index also shows an upward trend. Basically, inflation is neither holding the Fed back from moving nor pushing it to hike rates, which in my mind, reduces the barrier to a rate hike. If you approach the Fed’s thinking as being biased toward a move, then this report keeps a rate hike in play. Whether investors will see it that way is anyone’s guess. It is the day before the Memorial Day weekend and if the lack of traffic going into Philadelphia this morning is any indicator, people have already headed out. I hope everyone has a good one.