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Weekly Economic and Financial Commentary: A Holly Jolly Price Reprieve

U.S. Review

A Holly Jolly Price Reprieve

  • Falling gasoline prices kept consumer price inflation flat in November, supporting real income just in time for the holiday shopping season.
  • Holiday sales got off to a solid start in November. Excluding sales at gasoline stations, auto dealers and food service establishments, our holiday sales measure rose 0.8%. Total sales came in more modest at 0.2%, however, due in part to the aforementioned drop in gasoline prices and softer auto sales.
  • Industrial production increased 0.6% last month as unseasonably cold weather boosted utilities output. Manufacturing output was flat, and further cooling is likely.

A Holly Jolly Price Reprieve

Consumers are catching a break on inflation just in time for the holiday shopping season. After rising for seven straight months, the consumer price index was unchanged in November. Lower prices at the pump thanks to oil prices tumbling have led to an easing in inflation. After increasing 2.9% on a year-ago basis as recently as July, headline CPI is up only 2.2%. With oil prices falling further in the first half of December and unlikely to return to $76 a barrel anytime soon, inflation dynamics are looking more favorable for real consumer spending in the next few months.

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While headline inflation has eased up, the trend in core inflation has remained fairly steady. The core CPI rose 0.2% in November with goods and services both picking up (top chart). The 0.2% rise in core goods overstates the trend somewhat, however. Used auto prices jumped more than 2% for the second straight month, more than unwinding the 3.0% drop in September. At the same time, the resilience of the dollar is keeping the cost of imported goods muted. Like the consumer price index, import prices were held down by the drop in oil prices last month, leading to a monthly decline of 1.6%. But prices for nonfuel imports have also eased, declining 0.3% last month.

The lion’s share of core inflation, however, is services. Services exenergy, which account for 75% of the core index and 60% of headline CPI, rose a trend-like 0.2% in November. After a soft couple of readings, shelter costs picked up, but a sustained acceleration is doubtful given emerging pressure on home prices. But an increasingly tight labor market and firms’ willingness to raise prices suggest upward pressure on prices elsewhere. We expect core CPI to continue to rise a touch above 2% in the coming months after having picked up to 2.2% on a year-over-year basis in November.

The modest inflation backdrop bodes well for real consumer spending but dented retail sales, which are reported in nominal terms, in November. Total retail sales rose a modest 0.2% in November. The headline was held back by a 2.3% drop in gas station sales as prices tanked.

Excluding sales at gasoline stations, auto dealers and food service establishments, holiday retail sales rose 0.8% That points to the make-or-break holiday shopping season getting off to a solid start this year. As of November, sales in these categories were up 4.4% year-over-year, close to our call for holiday sales to rise about 4.5% this year (middle chart).

While consumer spending looks to be on solid footing, the latest data on industrial production hint at some modest cooling. Total production rose 0.6% in November, helped by a 3.3% rise in utilities as temperatures were below their seasonal averages. Despite the aforementioned decline in oil prices, mining rose 1.7% over the month, but is likely to cool in coming months given expectations of lower oil prices to remain. Manufacturing production was flat over the month. We would not be surprised to see some further moderation given the outlook for slower U.S. and global growth (bottom chart).

U.S. Outlook

Housing Starts • Tuesday

We expect November housing starts to come in below consensus, following last month’s 1.5% rise to a 1.228 million unit pace. All of last month’s increase came from the volatile multifamily sector, which has seen some renewed strength in recent months as apartment demand has proved to be much more resilient than had been expected this year. Single-family starts fell 1.8% in October, following a 1.0% drop the prior month.

Unfortunately, we expect to see more soft data on single-family starts. Sales have slowed in recent months and the November NAHB Wells Fargo Homebuilders Index plummeted eight points during the month, with expectations for future sales plunging 10 points. New home inventories have also risen, which we believe will cause builders to hold off on speculative projects. Apartment starts were also likely negatively impacted by fires out West and heavy rain across much of the South.

Previous: +1.5%, 1,228K Wells Fargo: -1.1%, 1,214K Consensus:+0.4% (Month-over-Month), 1,233K

Existing Home Sales • Wednesday

Existing home sales are also expected to come in well below the current consensus. We are projecting a 2.1% drop, following October’s 1.4% gain. That increase followed six consecutive monthly drops. Our below consensus call in November is based off the incredibly weak pending home sales data for October, which plunged 2.6% that month. October pe