KEY DATA: CPI: -0.2%; Excluding Food and Energy: +0.3%/ Starts: +5.2%; Permits: -3.1%/ IP: -0.5%; Manufacturing +0.2%

IN A NUTSHELL: “With the manufacturing and housing sectors improving and inflation on the rise, the Fed could easily signal that rate hikes are coming, possibly sooner than most think.”

WHAT IT MEANS: It was a good day for the U.S. economic data, at least if you like growth and a continued pick up in inflation. Consumer prices fell in February. So what else is new? Well, how about the broadening of price pressures outside the energy sector? Excluding energy, prices rose solidly. The core, which also excludes food, rose by the fastest pace in nearly four years. Looking at the details, there were few categories where prices actually declined. While it was good to see that cookie prices were down, that was offset by a rise in donut costs. Oh, well. There was one major outlier that may have artificially upped the price increase: Apparel prices surged 1.6%. That makes no sense at all since most of our clothes are imported and I don’t see that kind of increase in the import price data.

On the housing front, builders look like they are getting those shovels back into the ground. Housing starts jumped in February despite a massive, likely snow-induced, 50% drop in the Northeast. The Midwest, South and West were all up solidly. There were also increases in both the single-family and multi-family segments of the market. Looking forward, permit requests did fall. However, they had been running well ahead of starts. Even after the February decline, the three-month average for permits is still above the average for construction, so I don’t look at the drop as indicating a future slowdown in activity.

Industrial production fell sharply in February. Not to worry as utility output was down big-time. That’s weather. Meanwhile, manufacturing output increased decently, adding to a strong gain posted in January. The industrial heartland is coming back and is no longer the weakest link.

 MARKETS AND FED POLICY IMPLICATIONS: While yesterday’s data came down on the side of the Fed taking the cautious route at its meeting, today’s numbers, especially the inflation report, is a warning that the days of no price pressures are behind us. The FOMC cannot slough off the idea that inflation is not an issue, despite the headline declines in the reports. There is a broadening in the price pressures and while it is not high yet, it is no longer below the Fed’s target, when you remove energy. Because of the recent drop in petroleum prices, it may take until the fall before the year-over-year energy price decline is largely wiped out. But when that happens, the overall index will also exceed the Fed’s target and the Fed members have to start planning now for that eventuality. With the Fed’s statement and Janet Yellen’s press conference coming soon, investors are likely to remain cautious. But while the Fed is likely to keep rates steady, I think the members are willing to hint that rates could be going up. Investors may not be fully prepared for that.