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Consumer prices eased in December

January 18, 2010 | "Barron’s Econoday"

The Fed got its wish with the December CPI-inflation is subdued. Headline consumer price inflation eased to 0.1 percent from 0.4 percent in November and matched the market forecast. Core CPI inflation also was soft at 0.1 percent although higher than November's flat reading. The consensus had expected a 0.1 percent rise for the core CPI. Weakness in the CPI was largely in the housing component and especially the shelter subcomponent which was flat and reflected the weak housing market and high vacancy rates in apartments.

Food and energy components were up in the latest month but at a relatively moderate pace for both. Energy rose only 0.2 percent after a 4.1 percent surge in November. Food inflation firmed to 0.2 percent from a 0.1 percent rise in November.

Within the core, housing inflation was flat as was the shelter subcomponent. New vehicle prices fell 0.3 percent but used car & truck prices increased 2.5 percent as the cash for clunkers program took a sizeable segment off the used market. Recreation was down a sharp 0.4 percent in December while a modest 0.1 percent gain in medical care also helped keep the core sluggish. However, apparel rebounded 0.4 percent but followed two months of declines.

Year-on-year, headline inflation jumped to 2.8 percent (seasonally adjusted) from 1.9 percent in November. The core rate was edged up in December to 1.8 percent from 1.7 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.7 percent in December while the core was up 1.8 percent.

Overall, lingering effects of the recession (including a sluggish consumer sector and very weak housing sector) are keeping inflation subdued. Outside of possible gains in food (freeze related) and energy costs (higher crude oil prices), this is likely to continue in coming months. Bonds should like today's CPI but the Empire State manufacturing index, released at the same time, was a little higher than expected. Empire may have a positive effect on equities. But markets also have to get past this morning's industrial production report at 9:15 a.m. ET.

Market Consensus Before Announcement
The consumer price index-boosted by a surge in energy costs-jumped 0.4 percent in November after gaining 0.3 percent the month before. However, core CPI inflation eased to 0.0 percent (no change) after a 0.2 percent increase in October. We are likely to see a similar pattern in December but probably not with quite as good a core number. Energy costs will again see upward pressure from higher, seasonally adjusted oil prices. The spot price for West Texas Intermediate rose 4.0 percent in December on a seasonally adjusted basis while it fell 4.7 percent unadjusted. Analysts may be missing this effect as most expect a modest headline rise. For the core, shelter will likely be soft from rents being kept down by high vacancy rates and by weak demand for travel lodging.

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