Consumer Prices Decelerate, International Demand for US Assets Stronger Than Expected, Industrial Production Higher Than Expected

- The CPI for December rose .3% versus estimates of a .2% gain and a .8% rise in November.

- The CPI Ex Food & Energy for December rose .2% versus estimates of a .2% gain and a .3% rise in November.

- Net Long-term TIC Flows for November fell to $90.9 billion versus estimates of $50.0 billion and $114.0 billion in October.

- Industrial Production for December was unch. versus estimates of a .2% decline and a .3% increase in November.

- Capacity Utilization for December fell to 81.4% versus estimates of 81.2% and 81.6% in November.

BOTTOM LINE: Consumer prices in the US rose at a slower pace in December, signaling that inflation may decelerate, Bloomberg said. Slower economic growth will make it harder for companies to pass on higher costs to consumers, economists said. Core consumer prices rose 2.4% for all of last year versus a 2.6% gain in 2006. Energy prices rose .9% in December versus a 5.7% gain the prior month. Fuel costs were up 18% in 2007, the most in 17 years. The 10-year TIPS spread, a good gauge of inflation expectations, fell to 2.18% this morning, which is the lowest level it has been since August 2003. If the commodity mania is finally ending, as I suspect, inflation expectations are about to drop dramatically. I continue to believe inflation fears have peaked for this cycle and the secular trend of disinflation remains firmly in tact.

International buying of US financial assets rose more than forecasts in November, Bloomberg reported. International holdings of US stocks rose a net $4.6 billion in November. I continue to believe international demand for US assets will remain healthy and may even strengthen over the intermediate-term as the US dollar firms.

Industrial Production in the US was greater than forecast in December as exports surged, Bloomberg reported. Record US exports and a consumer that slows, but doesn’t collapse, will help the US economy to avoid recession, economists said. Utility production fell .2% after 2 months of no change. Output of computers and peripherals rose 1.1% versus a 1.7% gain the prior month. I expect industrial production to increase slightly this month on more seasonal weather and inventory rebuilding.