U.S. December Retail Sales Show Solid Finish to 2010

Retail spending in December rose 0.6% following an unrevised 0.8% gain
in November. Going into the report, expectations had been for sales to
rise 0.8%. In a separate report, December consumer prices rose 0.5% in
the month, which was slightly stronger than the 0.4% expected. Most of
the upward pressure reflected an 8.5% jump in gasoline prices.

Excluding energy and food prices, which were up 0.1% in the month,
core prices rose a much more moderate, and expected, 0.1%.
Most of the downward surprise in retail sales was in the gasoline
service station component where rising gasoline prices were expected
to see receipts rise close to the 3.8% increase recorded in November.

In the event, this component only rose 1.6%. Sales at auto dealerships
rose an expected 1.1%, which was in line with the earlier reported
unit sales figures. Sales excluding these two components rose 0.4%
following a downwardly revised 0.6% gain in November (previously
reported as 0.8%). The increase on this basis was slightly stronger
than the 0.3% expected and implied solid spending during the Christmas
sales period.

The consumer price report indicated limited price pressure outside of
the energy component. For example, shelter costs were only up 0.1%
while new vehicles were unchanged in the month. Airfares rose a more
robust 3.3% although this likely in large part reflected rising fuel
costs. The pressure from gasoline prices sent the year-over-year
increase in the overall CPI up to 1.5% from 1.1% in November. The
annual increase in core inflation remained unchanged at 0.8%.

The gain in retail sales is encouraging because it implies consumer
spending likely increased 4.0% at annual rate in the fourth quarter of
2010 with solid momentum going into the first quarter of 2011.
Spending by households will receive a further boost from the payroll
tax reductions introduced at the start of the year. Strength in
consumer spending is helping to sustain overall GDP growth at a pace
that will start to put greater downward pressure on the unemployment
rate. Under more normal recovery periods, such would initiate a period
of the unwinding the monetary stimulus introduced through a recession;
however, in the current context, the severe recession and attendant
rise in unused capacity suggest less urgency to do so. Slack in the
economy is acting to keep inflation fairly quiescent as evidenced by
today's CPI report for December showing core inflation rising only
0.8% on a year-over-year basis. Thus, although the Fed will be
heartened by indications of rising consumer spending, it will likely
continue with its quantitative easing initiative until mid-year 2011
to ensure that growth remains robust. Our forecast does not assume any
hikes to Fed funds until 2012.
Source: ActionForex.Com