As report by PNC Financial Services, the consumer price index was flat in December, with a 1.2 percent decline in energy prices over the month holding down overall inflation. Core inflation, excluding volatile food and energy prices, was 0.1 percent, in the narrow range where it has been recently. In November overall prices fell 0.3 percent and core prices were up 0.1 percent. On a year-over-year basis the overall CPI was up 1.7 percent in December, down from 1.8 percent in November and 2.1 percent in October, as falling energy prices have slowed inflation. Year-over-year core inflation was 1.9 percent in December, the same pace as in November.
The producer price index for finished goods fell 0.2 percent in December; falling energy and food price pushed down the overall finished goods PPI, with finished core goods prices up 0.1 percent for the month. Intermediate core goods prices rose 0.2 percent in December, while crude core goods prices rose 1.1 percent. On a year-ago basis finished core goods prices were up 2.0 percent, and intermediate core goods prices were up 0.7 percent. However, crude core goods prices were down 1.4 percent from one year earlier, indicating no inflationary pressures at the beginning of the supply chain.
Inflation remains under control. Over the past few months falling energy prices have led to stronger growth in after-inflation incomes, supporting consumer spending. This is especially important in early 2013 as higher taxes are dragging down disposable income growth.
There are few price pressures in the economy. Wage growth is still weak, and there is little upward pressure on prices in the early stages of the supply chain given soft global growth. Low inflation gives the Federal Reserve plenty of room to continue with its expansionary monetary policy. The central bank has said that it will keep the fed funds rate near zero until either the unemployment rate falls below 6.5 percent or expected inflation one to two years out moves above 2.5 percent. The latter does not look likely anytime soon, which means the Fed can keep rates extremely low in the medium term to support the labor market.
Industrial production rose 0.3 percent in December, after a 1.0 percent gain in November and a 0.3 percent decline in October in the wake of Superstorm Sandy. Manufacturing production rose 0.8 percent in December, with a 2.6 percent increase in output of motor vehicles and parts. Outside of motor vehicles manufacturing production was up a still-strong 0.7 percent. Mining production was up 0.6 percent in December, but utilities production fell 4.8 percent due to warm weather.
Manufacturing continues to expand, but the pace of growth is slowing (Chart 1). Vehicle production received a boost from Sandy, but is unlikely to increase much further in 2013. Business investment growth has slowed after big increases earlier in the recession. And export gains have weakened with slower growth in Asia and recession in Europe. Manufacturing had been leading the recovery, but is now roughly keeping pace with overall growth. In 2013 housing will replace manufacturing as a key growth driver as housing starts and sales continue to recover from their steep declines of a few years ago. Housing-related manufacturing industries will also support growth this year.
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