December U.S. Prices Probably Little Changed

December U.S. Prices Probably Little Changed

The cost of living in the U.S. was probably little changed in December as stores discounted merchandise during the holidays, supporting the Federal Reserve’s view that inflation will remain in check, economists said a report will show this week.

Consumer prices rose 0.1 percent after holding steady in November, according to the median forecast of 65 economists surveyed by Bloomberg News before Labor Department data Jan. 19. Another report may show output at factories, mines and utilities rebounded after falling for the first time in seven months.

Retailers from Williams-Sonoma Inc. (WSM) to Macy’s Inc. (M) cut prices to attract customers constrained by stagnant incomes and falling property values. The lack of pricing power means Fed officials have more leeway to take additional steps to spur growth should the economic expansion stumble.

“The inflation outlook provides the Fed with some wiggle room,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston. “While growth remains uneven, manufacturing activity has been resilient.”

Factories are bolstering the recovery that began in June 2009, while housing, which helped trigger the recession, is stabilizing, other figures may indicate this week.

The Labor Department’s inflation report may also show consumer prices excluding food and fuel rose 0.1 percent last month after climbing 0.2 percent in November, according to the Bloomberg survey median.

12-Month Increase
Compared with December 2010, the so-called core index was probably up 2.2 percent, the same as in the prior 12 months, economists projected.

Fed policy makers’ preferred price gauge, which is issued by the Commerce Department and is tied to consumer spending, rose 1.7 percent in the year ended in November. That is at the lower end of officials’ long-run forecast of 1.7 percent to 2 percent.

Inflation and pressures to raise prices “were very limited” at the end of last year, the Fed said in its Beige Book anecdotal business survey released on Jan. 11. Several district banks reported that “upward price pressures from rising commodity and input prices have eased substantially,” it said. Policy makers will use the report as a basis for framing their discussions at their next meeting on Jan. 24-25.

Discounting Merchandise
Retailers were among companies paring prices last month. Chains including Macy’s, Gap Inc. and Target Corp. offered discounts on already marked-down merchandise in the week after Christmas. Williams-Sonoma, the owner of the namesake, Pottery Barn and West Elm home-goods chains, last week said profit may be less than previously forecast due to holiday price-cutting.

Williams-Sonoma faced “greater challenges” given the heavy market discounting on nationally branded products, Chief Executive Officer Laura Alber said in a Jan. 12 statement.

Slowing global demand also means raw-material costs may cool. The producer price index rose 0.1 percent last month after a 0.3 percent gain in November, economists forecast ahead of a Jan. 18 Labor Department report.

Alongside cooling inflation, the economy is also benefiting from growth in manufacturing driven by inventory replenishment. The Fed’s data on December industrial production may show output rose 0.5 percent after falling 0.2 percent the prior month. The figures are due Jan. 18.

Regional reports from the New York Fed on Jan. 17 and the Philadelphia Fed on Jan. 19 may show manufacturing continued to pick up in January, according to economists surveyed.

Machinery Makers
The gains help explain the surge in shares of equipment makers so far this year. The Standard & Poor’s Supercomposite Machinery Index (S15MACH) has climbed 9 percent since the end of December, outpacing a 2.5 percent gain for the broader S&P 500.

Homebuilding is still lagging while sales may be starting to stabilize. Builders broke ground on fewer homes in December, and permits, a sign of future construction, were probably little changed, according to the Bloomberg survey median ahead of Commerce Department data on Jan. 19.

The next day, the National Association of Realtors may report sales of previously owned houses rose to a 19-month high in December, economists predicted.

Fed Chairman Ben S. Bernanke and his colleagues suggested in a recent paper that lawmakers try new programs to revive the housing market.

Bloomberg Survey

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Release Period Prior Median
Indicator Date Value Forecast
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PPI MOM% 1/18 Dec. 0.3% 0.1%
Core PPI MOM% 1/18 Dec. 0.1% 0.1%
Ind. Prod. MOM% 1/18 Dec. -0.2% 0.5%
Cap. Util. % 1/18 Dec. 77.8% 78.1%
NAHB Housing Index 1/18 Jan. 21 22
Initial Claims ,000’s 1/19 14-Jan 399 385
CPI MOM% 1/19 Dec. 0.0% 0.1%
Core CPI MOM% 1/19 Dec. 0.2% 0.1%
Housing Starts ,000’s 1/19 Dec. 685 680
Housing Starts MOM% 1/19 Dec. 9.3% -0.7%
Building Permits ,000’s 1/19 Dec. 680 675
Building Permits MOM% 1/19 Dec. 5.6% -0.7%
Exist Homes Mlns 1/20 Dec. 4.42 4.65
Exist Homes MOM% 1/20 Dec. 4.0% 5.2%
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source: bloomberg.com