* CPI tops expectations, points to firming inflation
* Housing starts fall more than anticipated
* Fed begins two-day policy meeting
* Futures down: Dow 42 pts, S&P 4.25 pts, Nasdaq 5.5 pts (Adds quote, data, updates prices)
By Chuck Mikolajczak
NEW YORK, June 17 (Reuters) - U.S. stocks were set for a modestly lower open Tuesday on weaker than expected data on the housing market as the Federal Reserve prepared to begin a two-day policy meeting.
Housing starts and building permits fell more than expected in May, as groundbreaking for homes dropped 6.5 percent to a seasonally adjusted annual pace of 1 million units.
But the Consumer Price Index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011, pointing to a steady firming of inflation pressures which should ease concerns of some Fed officials that inflation was running too low.
"This is the second quarter, this is the quarter that is suppose to rebound from the weather-related slowdown in the first quarter and there have been fits and starts of better than expected data, but as it pertains to housing, that hasn't been one of the shining stars," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
The S&P 500 has advanced over the past two sessions and is down 0.7 percent from its June 9 record close as escalating violence in Iraq gave investors reason for caution.
Scores of Iraqis were killed on Tuesday during a battle for a provincial capital, and fighting shut the main oil refinery, starving parts of the country of fuel and power as an uprising by Sunni insurgents threatened Iraq's survival as a state.
"We vacillate between caring about fundamentals and worrying about Iraq," said Hogan. "And obviously much more important than the economic data we get today will be what the Fed statement looks like tomorrow."
The Fed begins a two-day policy meeting on Tuesday, and is widely expected to chop another $10 billion from its monthly bond purchases but make few, if any, other concrete policy moves, putting the focus on whether officials tip their hand on longer-term plans for interest rates.
S&P 500 e-mini futures were down 4.25 points and fair value - a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract - indicated a slightly lower open. Dow Jones industrial average e-mini futures lost 42 points and Nasdaq 100 e-mini futures fell 5.5 points.
Yingli Green Energy shares climbed 4.3 percent to $3.67 before the opening bell after the company reported a smaller first-quarter loss.
U.S.-listed shares of GW Pharmaceuticals jumped 6.9 percent to $82.60 after the company said its experimental cannabis product Epidiolex showed promising results in children and young adults with treatment-resistant epilepsy. (Editing by Bernadette Baum)