KEY DATA: Sales: +0.6%; Excluding Vehicles: +0.5%/PPI: +0.3%; Less Energy: +0.2%; Goods: +0.7%

IN A NUTSHELL: “The summer lull in spending is over and with inflation moving upward, the argument against a rate hike is getting weaker and weaker.”

WHAT IT MEANS: Remember how people feared households had decided to stop spending? Well, it’s time to chill. Retail sales rebounded in September, led only in part by stronger vehicle demand. Indeed, excluding vehicles, sales were up almost as solidly. There were strong increases in spending on furniture, home building supplies and sporting goods. People ate out, ate in and shopped online. There was also a rise in gasoline purchases, but that may have been due to a jump in prices. The were some weaknesses in this report. Sales of appliances and electronics were soft, people didn’t visit department stores and despite the political campaign, they cut back on their health care purchases.

On the inflation front, the news keeps getting better for the Fed, at least for those pushing to raise rates. Wholesale costs rose solidly in September and the increases were broadly based. The real eye-opener was the jump in goods prices. Yes, energy costs were up, but it wasn’t just oil or even food, which also increased sharply. Almost every major category of wholesale goods posted at least a small gain. Goods price declines had been keeping inflation well in check, but that is no longer the case. On the services side, costs rose more modestly, the pattern most of the year. But with services price increases over-the-year in the 1.5% range and goods prices closing in on the zero mark, overall producer costs have a chance of turning positive for the first time in two years. Looking down the road, business cost pressures are slowly building. Intermediate product prices rose solidly and the year-over-year decline is the smallest in two years.

MARKETS AND FED POLICY IMPLICATIONS: The consumer is spending and cost pressures are slowly building. Sounds pretty good to me. We are not out of the woods on either the consumption or inflation front, but we are moving in the right direction. The September 20-21 FOMC minutes show that members are getting antsy about keeping rates so low. There were worries that future rate hikes might have to be faster than expected if a move upward was not done soon. On the other side, members still believe there is some slack left in the labor market and that trend growth has slow sharply, so a move right away wasn’t necessary. But what the FOMC really needs if it is to raise rates is inflation to move to its target rate of 2%. Then it can say that it is just about at full employment and inflation is at its desired level. A Fed tethered to data would have every reason to hike. That world is just about here. As for investors, it is earnings season and while today’s data should buoy confidence that the economy is not heading downhill, the supposedly forward-looking indices will be adjusting for the results of the backward-looking profit numbers.