Inflation Tame, Foreign Demand for US Assets Still High

- The Consumer Price Index for December fell .1% versus estimates of a .2% increase and a .6% decline in November.
- The CPI Ex Food & Energy for December rose .2% versus estimates of a .2% increase and a .2% gain in November.
- Net Foreign Security Purchases for November rose to $89.1 billion versus estimates of $85.0 billion and $104.2 billion in October.

BOTTOM LINE: US consumer prices unexpectedly fell for a second month in December as energy prices declined, Bloomberg reported. Energy prices declined 2.2% after falling 8% in November versus a 17% rise last year at this time. Moreover, the cost of all goods including autos, clothing and food fell .3% after a 2.2% decline the prior month. Finally, airfares fell 2.9% last month. I continue to believe measures of inflation will decelerate throughout most of the year, helping to keep long-term interest rates low and boosting stock prices.

Foreign investors raised their holdings of US assets by $89.1 billion in November in pursuit of higher investment returns after October's all-time record demand, Bloomberg said. Demand for US Treasury securities rose by a record $54.6 billion. The UK, Japan and China all raised their holdings of US Treasury securities in November. As well, foreign investors invested $4.7 billion in US stocks even as major US indices trailed some other countries’ benchmarks during November. US stocks are outperforming other major global indices in 2006. I expect foreign demand for US assets to remain strong over the intermediate-term as the US economy continues to outperform those of other industrialized nations, US stocks rise, the dollar remains firm, inflation decelerates and the mania for emerging markets and commodities subsides.