KEY DATA: Sales: +1.2%; Excluding Vehicles: +1%/ Import Prices: +1.3%; Nonfuel: 0%; Export Prices: +0.6%; Farm: -1%/ Claims: 279,000 (up 2,000)

IN A NUTSHELL: “Consumers stepped up their spending sharply in May, adding to the belief that the economy has moved back into a solid growth trend.”

WHAT IT MEANS: Households have been stashing away a lot of the savings from the gasoline price drop, limiting the positive impact on spending expected from lower energy costs. But that may be changing. Retail sales soared in May and it wasn’t just the huge rise in vehicle sales. Demand was up solidly for just about everything except health care products and restaurants. I guess the headaches caused by the winter are cured. Eating out had been the favorite way to spend money and for the first five months of the year, total restaurant spending is up almost 9% from 2014 levels. A one-month modest rise was not a major surprise. The sharp rise in gasoline sales was due to the jump in gasoline prices. The sub-category that best mimics the consumption number in GDP, core sales, rose solidly after a modest increase in April. That provides some hope that consumption will strong in the second quarter.

After ten months of declines, import prices finally rose in May. However, all of the gain was in energy. Still, after eight months of falling prices, we did get some stability in the nonfuel portion. Imported foods started to increase again but capital and consumer goods costs were flat. On the export side, if you weren’t a farmer, you could raise prices. But the long-suffering farm sector saw another sharp decline in the prices they are getting on the world market.

Jobless claims edged upward but they are still at levels consistent with further tightening of the labor market.

MARKETS AND FED POLICY IMPLICATIONS: Consumer spending on nondurable goods was the chief reason that first quarter consumption was modest. That is no longer the case. In addition, we are likely to see even better durable goods demand. So it looks like consumers will be adding more to growth in the second quarter than they did in the first quarter. Add to that a turnaround in the trade deficit, which cost the economy nearly two percentage points, and we are setting up for a very solid quarter. In addition, the long decline in import prices should start stabilizing the inflation data. Indeed, the Consumer Price Index’s non-food and energy component has been rising at about a 2.5% pace for the past four months and there is no reason to think that will change going forward. I expect the Fed’s preferred Personal Consumption Expenditure deflator to follow the CPI upward. And if you add in the continued tightening in the labor market, it looks like most of the conditions for a rate hike are nearly in place. By the July meeting, there should be little reason, other than the lack of a press conference, not to start raising rates. Assuming Chair Yellen wants to personally “meet the press”, a September rate hike is highly probable – and it could be a foregone conclusion by then.