Perhaps a bit encouraging today was that increases in the cost of living appeared to be under control this past month. According to the U.S Department of Labor, the Consumer Price Index (CPI-U) decreased month-over-month by 0.2% in November, landing below with the Street's estimate of 0.1%. Concurrently, excluding the food and energy contributions to inflation, core CPI increased 0.1%, in line with the Street's estimate. The fact that total inflation was less than expected is certainly encouraging for consumers as they will likely be motivated to continue shopping this Christmas season. It should be noted that gasoline prices decreased a whopping 7.4%, after decreasing 0.6% in the prior month, which should also be encouraging for consumer shopping.
Moreover, given that core inflation is running at a 12-month trailing average that is well below 2.5%, the Fed will still continue to feel free to execute its quantitative easing plan to fuel the overall economy. Over the last 12 months, total CPI has increased 1.8%, decreasing from the 3.4% posted for comparable year ago period. At the same time, core CPI has increased 1.9%, decreasing from the 2.1% posted for comparable year ago period. Given that the Fed is expected to continue its quantitative easy efforts for as long as inflation is below 2.5%, the result certainly does not impede the Fed from enacting monetary policy; however, reluctance to ease money will likely come as the effects of further stimulus is likely to be limited.
Clearly, consistent with its dual mandate, the Fed is attempting to improve employment while maintaining inflation at steady normal rates between 2% and 3% per year. As we have witnessed this week, the Fed has said that it anticipates that inflation over the medium term will likely run or below 2.5%, which means the Fed sees downside risks in the near term; as such it is acting in a preemptive manner to counter negative economic events, particularly coming from abroad. This indication of downside risk put markets in losing territory on Wednesday and set the negative momentum lingering till today. At the moment, the Dow Jones Industrial Average is in the red by over 20 points, and with the fiscal cliff dilemma still not resolved, the negative momentum will likely continue.
Industrial production jumped in November by the most in two years as U.S. manufacturers began to rebound from the damage inflicted by Superstorm Sandy. Output at factories, mines, and utilities increased 1.1% last month, the most since December 2010, after a 0.7% drop in October that was larger than previously estimated. The Street had modeled for a 0.3% increase during November.
The report also showed motor-vehicle production increased 4.5% in November, the most since January, following no change the prior month. Cars and light trucks sold at a 15.5 million annual rate in November, the most since February 2008, boosted in part by buyers replacing cars damaged by the storm, according to data from Ward's Automotive Group.
There was the benefit from Sandy, but the improvement in industrial production is also in conjunction with some strength in China and Germany. That is where some of the strength in the market is coming from today (the Dow is straddling the breakeven mark), which is being offset by the uncertainty surrounding the Fiscal Cliff. I think this was a good report and really bodes well for the economy as a whole, especially considering the Fiscal Cliff debacle looming over the market's head.