US Stocks Add to Modest Gains After Retail Sales Report; PPI Data Suggests Inflation Could Be Peaking

Both U.S. retail sales and producer inflation fell more than expected in December with the reports saying nothing that will derail the markets’ expectations for a 25-basis point rate hike by the Fed in February.

However, there are some concerns over the size of the decline in retail sales since strong consumer spending will be necessary to soften the impact of a recession. Furthermore, energy prices are higher in January, which suggests the PPI may flatten out or rise for the month.

Retail Sales Fell 1.1% in December as Consumers Feel Pressure from Inflation

U.S. retail sales for December declined 1.1%, even worse than the Dow Jones estimate for a 0.8% drop. The previous month was even revised lower to -1.0%.

Core retail sales also weakened by 1.1%, versus an estimate for a decline of 0.5%. November’s figure was also revised lower to -0.6%.

Today’s retail sales figures are not adjusted for inflation, so the latest reading reflects both receding inflation and tepid consumer demand during the holiday shopping season.

Drop in PPI Signals Easing Inflation

U.S. wholesale prices fell 0.5% in December, much more than expected, serving as another sign that inflation, while still relatively high, is abating.

The producer price index, which measures final demand prices across hundreds of categories, declined 0.5% for the month, the Labor Department reported Wednesday. Economists surveyed by Dow Jones had been anticipating a decrease of 0.1% in December.

Excluding food and energy, the core PPI measure rose 0.1%, matching the forecast.

The report shows that a sharp drop in energy prices were primarily responsible for the decline in the headline reading for the month. The PPI’s final demand energy index plunged 7.9% on the month. Within that category, wholesale gasoline prices fell 13.4%.

The final demand food index also fell, declining 1.2%.

Future Inflation Readings Less Certain at This Time

Inflation may have eased on both the producer and consumer levels in December, but the early price action in the energy markets suggests potentially rougher times ahead.

So far in January, a gallon of gasoline is up about 21 cents from this time last month, and crude prices are up about 1.6% for the same time period.