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CPI tame, retail sales up
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December 14, 1999: 11:59 a.m. ET
Prices rise less-than-expected 0.1% in November; retail sales jump 0.9%
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Consumer prices rose at the slowest pace in five months in November while retail sales posted a surprising jump, the government said Tuesday, pointing to a strong holiday shopping season and more solid economic growth with little inflation.
The Consumer Price Index, the government's main inflation gauge, rose 0.1 percent in November, the Labor Department said, less than economists’ expectations of a 0.2 percent gain and below October’s 0.2 percent reading. Excluding volatile food and energy costs, prices rose 0.2 percent.
Separately, the Commerce Department reported that retail sales advanced at a 0.9 percent pace in November, more than economists’ expectations of a 0.5 percent gain and the revised 0.3 percent reading registered in October. Excluding autos, retail sales advanced 0.4 percent.
Together, the reports suggested a story about the U.S. economy that is becoming very familiar: strong growth without any sign of inflation. Nonetheless, investors, particularly in the bond market, chose to focus on the robust retail sales numbers, expressing concern that demand that hot eventually will lead to higher prices on store shelves.
Old news?
"The market sees this as old news, if you will, and they’re focusing on whether these prices translate into faster inflation,” said Michael Marzano, a senior securities analyst at Greenwich Natwest Futures in Chicago. "Inflation at the consumer level hasn’t appeared yet, but there’s concern that it will.”
Bonds, which are sensitive to both economic growth and inflation expectations, plunged after the report’s release, with the 30-year benchmark Treasury bond slipping almost a full point in price. Stocks followed once the official trading day began on Wall Street, albeit with a more muted reaction.
Click here for the latest bond prices from CNNfn.com
Of concern to both sides of the market is the Federal Reserve, and whether policy makers will see fit to raise interest rates again in the new year to slow the economy down and keep inflation as tame as it appears to be currently.
Most analysts don’t expect the Fed will raise rates a fourth time when officials gather next week in Washington for their last policy meeting of the year - mostly because the meeting is so close to the holidays and to potential Y2K computer glitches.
February rate rise?
Even so, many analysts expect the Fed to raise rates in the new year, perhaps as soon as the Feb. 2 policy meeting, judging by the implied yield on the February fed funds futures contract. The yield rose 1/100th of a percentage point to 5.70 percent, indicating traders see about an 87 percent chance of a quarter-point rise.
The yield represents where investors think the fed funds rate will be down the road. The fed funds target is an interest rate that the Fed controls to determine how much financial institutions will charge on consumer and business loans. The fed funds rate currently rests at 5.5 percent.
Click here for the Labor Department’s full report on November consumer prices
"The trend in consumer spending remains too hot for the market's liking,” said Sherry Cooper, chief economist at brokerage Nesbitt Burns Inc. "Retailers have entered the critical Christmas shopping season with considerable momentum.” Her firm forecasts at least one more rate hike in the new year.
Higher prices for housing, food and medical costs, among other things, were offset by lower prices for clothing and transportation, the Labor Department said. Compared to a year ago, consumer prices advanced at a 2.6 percent pace and the core rate gained 2.1 percent, close to its 33-year low of 1.9 percent recorded in August.
Energy prices were flat in November as falling prices for gasoline and electricity offset higher prices for fuel oil and natural gas. Transportation costs, too, registered no gain on the month.
Robust retail sales
As for retail sales, a 2.4 percent increase in auto sales pushed the index higher for the month. New car sales account for about one-quarter of the sales the Commerce Department compiles each month.
The data, combined with strong same-store sales and other anecdotal evidence of a robust Christmas shopping season, was enough to convince bond investors that consumers’ voracious appetite for new goods and services isn’t letting up, and could spur faster inflation down the road.
Consumer spending accounts for more than two-thirds of U.S. economic output.
"The retail sales number and the upward revision to the October retail sales puts fourth quarter consumer spending on about 4.25-percent percent path,” a pace that could lead to more growth-slowing interest rate increases in the new year, said Michael Cloherty, a bond market strategist at Credit Suisse First Boston.
That’s a trend that concerns economists, investors and Fed policy makers. Personal wealth created by the gung-ho stock market and capital gains from rising home sales already have boosted consumer spending this year. That trend is likely to continue in 2000, Fed Chairman Alan Greenspan said in a speech earlier this month.
General merchandise store sales rose 0.6 percent following a slim 0.2 percent October rise, and clothing store sales rose 0.8 percent to $11.4 billion after being flat in October. Gasoline sales were up 1.1 percent to $16 billion, more than double October's 0.5 percent gain. 
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