U.S. CPI Total & Core Slightly Above Expectations

The consumer price index (CPI-U) rose 0.8% last month due to the surge in energy prices. The gain was the quickest since September of 2005, a month when higher energy prices similarly raised the index.A 0.6% rise in the November CPI had been expected by a Consensus of economists. The y/y gain in prices of 4.3% was its quickest since June of last year.

Core consumer price inflation picked up slightly to 0.3% after five months of 0.2% increase. A 0.2% gain was the general expectation. The y/y increase of 2.3% was its quickest in six months and the three month rise, to 2.6% (AR), has shown acceleration this year.

Energy prices soared 5.7%, the fastest rise since a 5.9% increase during March of this year. Those two gains were the quickest since an 11.8% surge in 2005. That was subsequently followed by m/m declines and/or more moderate gains in energy prices. Gasoline prices jumped 9.3% (37.1% y/y) last month but the weekly data already indicate a slight m/m decline in December. Prices for fuel oil & other fuels surged 11.9% (28.4% y/y) but natural gas & electricity prices rose just 0.7% (4.4% y/y).

Food & beverage prices rose 0.3% (4.7% y/y) but that was enough to lift the y/y increase to its fastest since 1991. Prices of dairy products were notably strong and rose 0.6% (14.0% y/y). Prices for fruits & vegetable jumped 1.6% (4.5% y/y) but prices for meats, poultry & fish fell 0.1% (5.4% y/y).

Core goods prices rose 0.2% after slight declines during each of the prior three months. Apparel prices surged 0.8% (-0.4% y/y) after having been unchanged in October. New & used motor vehicle prices were unchanged (-0.4% y/y) after two months of decline. Prices of household furnishings & operation rose a slight 0.1% (-0.7% y/y) after four straight months of decline.Tobacco prices increased 0.2% (8.2% y/y) for the second month but the y/y gain was its strongest since early 2003. The core CPI less tobacco rose 0.3% (2.3%).

Core services prices rose 0.3% (3.2% y/y). Shelter prices increased 0.3% (3.1% y/y) and that y/y change was its slowest since early this year. Owners equivalent rent of primary residence, a measure not equivalent to other house price measures, rose 0.3%, reducing the y/y gain to 2.8% y/y. Since a low several months ago of 1.8%, the three month change has picked up to 3.4%, its firmest since January. Public transportation prices rose 1.8% (6.1% y/y) and medical care services prices rose 0.3% (5.8% y/y). Education service prices rose 0.6% (5.5% y/y) after a firm 0.7% October gain but communication prices fell (-0.1% y/y) for the second consecutive month.

The chained CPI, which adjusts for shifts in the mix of consumer purchases rose 0.4% (3.6% y/y) but the core measure was unchanged. This latter measure is similar to the core PCE price index but its treatment of housing price differs

Industrial production rose 0.3% last month but the increase recovered less than half of the downwardly revised 0.7% drop in October. The Consensus expectation had been for a 0.2% rise.

Factory output also recovered from an October drop that was revised deeper. The 0.4% November increase left the three month change in output at -0.3%.

Output gains were broad based. Production in the motor vehicle & parts industries rose 1.6% and recovered all of the prior month's 1.5% drop. However that still left output down 1.6% from a year earlier. Output of furniture & related products bounced 0.4% (-2.0% y/y) following two months of sharp decline and output of construction supplies was unchanged (1.0% y/y).

Also in the consumer goods sector, production of computers & electronics rose 1.5% (+13.4% y/y). Output of apparel was unchanged (-3.8% y/y) but output of chemical products was down for the fourth straight month (-0.5% y/y).

Output of business equipment rose a solid 1.0% (4.0% y/y). Output of information & processing equipment surged 2.3% (9.3% y/y). Three month growth amounted to 11.9% (AR). Production of industrial equipment inched up 0.2% after a 0.9% October shortfall. Three month growth recovered to 2.7% (AR), well below the 6.7% growth of last year.

In the materials category output rose 0.5% and recovered all of the prior month's decline. Production of durable consumer parts rose 0.9% (5.0 y/y). Production of durable equipment parts surged 1.4% (7.4% y/y) but consumer durable parts output only rose 0.5% (-0.5% y/y) after three months of sharp decline.

Capacity utilization inched up to 81.5% from a revised 81.4% in October. Utilization in the factory sector also rose slightly m/m to 79.8% and averaged 80.2% last year. Capacity rose 0.1% (1.8% y/y).

The Macroeconomics of Oil Shocks from the Federal Reserve Bank of Philadelphia can be found here.

The CBI Industrial Survey shows still firm readings for measures of activity. Orders are still in the 86th percentile of their range. Export orders remain in the 98th percentile of their range. Output volume is much softer in the 55th percentile of its range. Stocks are a bit above mid range as well in their 57th percentile, roughly balanced with the position of sales. Average prices expected remain elevated with a +15 reading, down from +21 in November but still in the 82nd percentile of their range.

Orders are surprisingly resilient especially for exports a surprise given the buoyancy of the pound sterling and given the slowing signals we have seen for the Euro area, to say nothing of slowing in the US. But output volume has sunken well below its 12-month average of +15 to stand at +3. There is some disconnect between orders and output trends. Clearly one aspect is that the overseas economies are holding up better than is the UK economy. Meanwhile, the average inflation reading over 12 months is +17 and that is only a touch stronger than the +15 reading for December that lingers as current output readings have softened.

The inflation trends tell the story. It’s a clear story of angst at the ECB. The sequential growth rates (3Mo Vs 6Mo Vs 12Mo) show a steady quickening of the pace of inflation in the more recent time periods. Over 12 months (ECB’s preferred horizon) three of our four key EMU countries show ex food ex energy and ex alcohol inflation at a pace above the ECB ceiling. Over the more recent periods that situation has only gotten worse. As to headline inflation: forget about it. The history on the graph on the let shows that once headline inflation spurts the core rise usually follows in a year or so. The year 2005 was an exception when the core fell by itself. There is nothing automatic about headline-> core inflation transmission. But there is enough correlation to make the ECB’s fears of second or third round effects real. On top of that the current core pace is simply unacceptable.

If the multi-central bank dollar credit facility is ‘successful’ it could hasten the time when the ECB hikes rates. Whether that widens interest differentials with the US depends on whether US circumstances normalize and whether such normalization brings with it a rebalancing of the economy (where consumer confidence is sagging so badly and in a way that it does not appear to be wholly determined by credit market issues).

While the credit turmoil, crisis, scam or whatever you may want to call it, is a real and essentially global phenomenon, it is not the only concern in town. And that applies to the evolution of European growth as well as in the US. In Europe arguably much of the outlook hangs in the balance on what the euro does from here on out. What inflation does and how the ECB responds to it will be a large par of that.