Inflation Tame Ex Energy, Retail Sales Remain Firm, Industrial Production Falls and Confidence Stays Low

- The Consumer Price Index for September rose 1.2% versus estimates of a .9% increase and a .5% gain in August.
- The CPI Ex Food and Energy for September rose .1% versus estimates of a .2% gain and a .1% rise in August.
- Advance Retail Sales for September rose .2% versus estimates of a .5% gain and a 1.9% decline in August.
- Retail Sales Less Autos for September rose 1.1% versus estimates of a .8% gain and a 1.0% increase in August.
- Industrial Production for September fell 1.3% versus estimates of a .4% decline and a .2% increase in August.
- Capacity Utilization for September fell to 78.6% versus estimates of 79.4% and 79.8% in August.
- Preliminary Univ. of Mich. Consumer Confidence for October fell to 75.4 versus estimates of 80.0 and a reading of 76.9 in September.

BOTTOM LINE: US consumer prices jumped last month after Hurricanes Katrina and Rita, Bloomberg reported. The core inflation rate hasn’t accelerated since March, suggesting companies can’t pass along higher raw materials price to consumers. Computer prices declined .8% after a 3.1% fall in the prior month. They are 18% cheaper than at this time last year. The cost of clothing also fell .1%, airfares fell 1.4% and used cars prices declined .4%. I expect the CPI to decelerate meaningfully over the intermediate-term as unit labor costs decelerate and commodity prices fall.

Sales at US retailers rose .2% last month as consumers spent more to fill up their gas tanks and bought furniture and electronics for their homes, Bloomberg said. Rising incomes and home equity have given Americans the means to increase spending even as gas prices rose. Sales at electronics and appliance stores rose .8%, furniture sales rose 1.2%, restaurant sales rose .2% and general merchandise sales rose .9%. September was the fourth warmest in 111 years which led to a .2% decline in clothing sales. I expect retail sales to accelerate into year-end on colder weather, lower energy prices and better consumer confidence.

US industrial production plunged 1.3% in September, the biggest drop in 23 years. However, excluding the effects of the hurricanes and lost production due to the Boeing strike, industrial production rose about .90%, according top economists. Capacity Utilization fell which suggests inflation will decelerate going forward. I expect industrial production to bounce back as the effects of the hurricanes diminish.

US consumer confidence unexpectedly fell for a third month to the lowest in more than 13 years as concerns persisted about high energy prices and hurricane-related economic disruption. The current conditions component of the index fell to 95.7 from 98.1 in September and the expectations component fell to 62.4 from 63.3. Consumers forecast inflation will accelerate to 3.1%, the fastest since 1997. However, unleaded gas futures have plunged 42.0% since September highs. I continue to believe sentiment will rebound strongly into year-end as energy prices fall, job growth bounces, interest rates remain low and the economy strengthens.