Another Measure of Inflation Tame, Retail Sales Healthy, Business Inventories Rise

- The Producer Price Index for December rose .9% versus estimates of a .4% increase and a .7% decline in November.
- The PPI Ex Food & Energy for December rose .1% versus estimates of a .2% gain and a .1% increase in November.
- Advance Retail Sales for December rose .7% versus estimates of a .9% increase and an upwardly revised .8% gain in November.
- Retail Sales Less Autos for December rose .2% versus estimates of a .4% increase and a .4% decline in November.
- Business Inventories for November rose .5% versus estimates of a .4% increase and a .4% rise in October.

BOTTOM LINE: Core US producer prices rose less than forecast in December, a sign of tame inflation as companies had little success in passing along higher energy costs, Bloomberg said. The core index gained 1.7% in 2005, less than the 2.3% increase in 2004 as global competition continues to restrict the ability of companies to raise prices. Prices of material used at the beginning of the production process, including timber and scrap steel, fell 2.3% in December after declining 1.2% the prior month. I continue to believe measures of inflation will decelerate again in 2006 as US growth slows to averages levels, Chinese growth decelerates, energy prices continue to fall, labor costs are held in check and the dollar remains firm.

US retail sale rose less than expected in December as consumers bought more cars and less of everything else, Bloomberg said. Vehicle sales rose to a five-month high of 17.2 million units. Retail sales for all of 2005 rose a strong 7.3% to $4.19 trillion, the most in US history. I continue to believe retail sales will remain healthy this year as interest rates remain historically low, the labor market remains healthy, consumer confidence improves, energy prices fall further and stock prices rise.

US business inventories rose for a fourth straight month in November, reflecting increases in stockpiles at auto dealers and retailers as companies prepared for the holiday shopping season, Bloomberg reported. The amount of goods on hand at the end of November increased to 1.26 months at the current sales pace, up from an all-time low in October. I continue to believe inventory rebuilding and healthy demand will add to economic growth as companies gain confidence in the durability of the current economic expansion.