Inflation remains subdued. The Consumer Price Index (CPI) edged up 0.1 percent in December, the smallest monthly increase since July (see Chart). The slight rise in inflation was attributable to a 0.2 percent increase in food prices and a 0.2 percent rise in energy prices. While food prices have fallen by 0.5 percent over the past year, the year-over-year changes in energy components have been much larger (the gasoline price index rose by 53.5 percent and fuel oil rose by 6.5 percent).  ”Core CPI,” which excludes the more volatile energy and food prices, rose 0.1 percent in December and 1.8 percent year-over-year.   A 2.5 percent rise in the price index for used cars and trucks accounts for almost half of the increase in Core CPI.  Cash for clunkers, which provided a government voucher of $3500 to $4500 for car owners who traded in used cars and bought new ones, likely raised the demand for used cars while lowering the supply (since trade-ins were subsequently destroyed).  The price index for new cars fell in December, although increased in September through November.  Overall in 2009, the price indices for new and used cars rose 4.9 percent and 9.2 percent, respectively. 

Retail sales decline. Sales at retail and food establishments declined 0.3 percent from November to December, after increasing for the previous two months.  Even after excluding motor vehicles and parts, sales declined 0.2 percent in December.   The decline in sales in December is relative to the upwardly revised figures for sales in November.  However, December’s sales are up 5.4 percent from the previous year.  While December sales were lower than November sales in a broad range of categories, sales rose at nonstore retailers for the fifth consecutive month.  Nonstore retailers (which include internet and catalog only sellers) increased 10.3 percent in December on a year-over-year basis, providing further evidence that shoppers are shifting away from traditional stores.   The overall decline in December sales indicates that personal consumption spending, which is a major component of GDP, remains fragile and that a robust consumption-led recovery is unlikely.  The Federal Reserve’s  Beige Book, a summary of current economic conditions in the twelve Federal Reserve Districts, indicated modest improvement in economic conditions in most districts with 2009 holiday spending slightly greater than 2008 spending (but far below 2007 levels).  Consumer spending may be constrained by consumers’ ability to finance purchases by borrowing.  Although consumer credit outstanding has fallen by almost 4 percent (as of November 2009), households remain highly leveraged, spending 12.85 percent of take-home pay just in interest on their debt.

Industrial Production expands due to cold snap. Industrial Production (IP) rose by 0.6 percent in December to 100.3. IP has increased for six consecutive months rising by nearly 5.0 percent over that time period. However, IP remains 12.1 percent below the record high reached in the initial stages of the recession (112.4).  Capacity utilization, which measures output as a percentage of total capacity, rose by 0.5 to 72.0.  However, since December 2008, only utilities have experienced growth in capacity utilization.