November Consumer Prices, Industrial Production/Capacity Utilization

Energy Prices Fell as Production Rebounded From Sandy

  • The November Consumer Price Index declined by 0.3 percent as energy prices fell.
  • The November Core CPI increased by 0.1 percent, gaining 1.9 percent over the previous 12 months.
  • Industrial Production increased by 1.1 percent in November as output in the Northeast rebounded.
  • Total industry Capacity Utilization increased to 78.4 percent in November, still a historically weak level.

Inflation is cooling at year-end as energy prices ease. The consumer price index for November declined by 0.3 percent. The energy component of the CPI fell 4.1 percent in November, after a 0.2 percent drop in October. Easing gasoline prices are the biggest part of that drop. According to AAA the national average price of regular unleaded gasoline is now $3.29 per gallon, down from $3.44 a month ago. Also, residential electricity prices are easing due to the increased use of very cheap natural gas. Over the last year consumer electricity prices have dropped 0.7 percent on average. We have seen some gains in food prices at the producer level, but so far gains at the consumer level have been muted. The price index for consumer food gained 0.2 percent in November, the same as in October. Firmer rents and gains in house prices also have the potential to push up consumer prices, but in the official statistics, the gains to the price of shelter have been moderate.

Looking directly at house prices, the Case-Shiller 20-city composite house price index was up 3.0 percent in September from a year earlier. Increasing house prices will eventually put some upward pressure on the CPI.  But the shelter price component of the CPI typically shows much less volatility than the direct measures of house prices, including the Case-Shiller indexes. Outside of food and energy, there is little upstream pressure on consumer prices. The core producer price Index for finished foods (excluding food and energy) gained just 0.1 percent in November and was essentially unchanged from July. The core CPI was up just 0.1 percent in November, and 1.9 percent from a year earlier. On the other side of the inflation equation, there is little push from wages. Average hourly earnings for all workers were up 1.7 percent in November over the previous year. This relatively benign inflation environment has given the Federal Reserve the green light to undertake aggressive monetary easing. Also, the Fed has relaxed its near-term inflation tolerance to about 2.5 percent (based on the trimmed mean PCE price index, not the CPI). For now, inflation is not the key issue for the Fed, the elevated unemployment rate is.

U.S. industrial production increased by 1.1 percent in November, as industries washed out by Hurricane Sandy in late October got back to work. Also as a result of Sandy, auto sales surged in November to a 15.5 million unit rate. In today’s IP report we see that vehicle assemblies were up 6.4 percent to a 10.46 million unit pace in November. Vehicle sales will likely ease in December, but a moderate uptrend in sales will continue in 2013 as long as we avoid driving off the Fiscal Cliff. This will support ongoing moderate gains to U.S. vehicle production. A revitalized auto industry, an improving housing industry and a revolution in U.S. energy markets are all positives for U.S. manufacturing in 2013.

Market Reaction: Equity markets opened with losses. Treasury yields are down. NYMEX crude oil is up to $84.46/barrel. The dollar is down against the yen and the euro.

Click here for a PDF version of the Comerica Economic Alert: CPI 121412.

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