Producer Prices Fall, Retail Sales Fall on Declining Gas Station Receipts, Consumer Expectations Jump Most in Over 17 Years

- The Producer Price Index for August fell -.9% versus estimates of a -.5% decline and a 1.2% increase in July.

- The PPI Ex Food & Energy for August rose .2% versus estimates of a .2% gain and a .7% increase in July.

- Advance Retail Sales for August fell -.3% versus estimates of a .2% gain and a downwardly revised -.5% decline in July.

- Retail Sales Less Autos for August fell -.7% versus estimates of a -.2% decline and a .3% increase in July.

- Preliminary Univ. of Mich. Consumer Confidence for September jumped to 73.1 versus estimates of 64.0 and a reading of 63.0 in August.

BOTTOM LINE: Prices paid to US producers fell in August, as lower energy prices eased inflation pressures, Bloomberg said. Import costs fell in August by the most in almost 20 years, Labor figures showed yesterday. Energy prices paid by producers fell 4.6%, the largest decline in almost 2 years. Prices for raw materials, or so-called crude goods, plunged 11.9% during August versus a 4.2% rise the prior month. Passenger car prices fell .3% and the cost of light trucks fell 1.9%, the most since October 2006. Consumer goods prices fell 1.2%. According to the median forecast in Bloomberg’s monthly survey of economists, the Fed will keep the benchmark interest rate unchanged at 2% through the first three months of 2009. The 10-year TIPS spread, a good gauge of inflation expectations, is 1.95%, the lowest in over 5 years. As I said a few months ago, I still believe inflation fears have peaked as the commodity bubble continues to burst and the secular trend of disinflation reasserts itself.

Sales at US retailers unexpectedly dropped in August, Bloomberg reported. Filling station sales fell 2.5% in August versus a .2% gain the prior month. The average price of a gallon of gas fell to $3.76/gallon last month versus $4.06/gallon in July. Excluding gasoline, retail sales were unch. versus a .6% decline in July. Sales at car dealers and parts stores increased 1.9%, the first gain since January and the biggest in a year. Weekly retail sales rose +1.8% this week, which was the third consecutive week showing improvement. As well, weekly retail sales are well above the +.5% gain seen during the first week of March. I expect retail sales to improve into year-end on pent-up demand, falling energy/food prices, decelerating inflation, low interest rates, rising stock prices, better consumer sentiment and diminishing housing fears.

Consumer Confidence rose the most in more than 4 years as a decline in gasoline prices boosted Americans’ spirits, Bloomberg reported. Americans expect inflation to subside, according to the report. Consumers thought prices will rise 3.6% in the coming 12 months versus expectations of a 4.8% increase a month ago. The Consumer Expectations component of the index surged to 70.9 from 57.9 the prior month. This was the largest monthly gain in Consumer Expectations since March 1991, which was the month after the end of the Gulf War. The Current Conditions component, which measures Americans’ perceptions of whether it is a good time to buy cars and other big-ticket items, climbed to 76.5 from 71.0 in August. I believe the rise in food/energy prices has had a much larger negative impact on consumer sentiment than generally perceived. I expect sentiment to improve modestly next month and substantially by year-end.