Dec. 16, 2009 – 7:40 a.m. CT

Temporary Energy Surge in Inflation; Housing Bounces Back

Consumer prices rose 0.4% in November, buoyed almost entirely by rising oil prices. Core inflation remained essentially unchanged, as aggressive discounting in the days leading up to and following Thanksgiving provided some offset to additional health care inflation. Vehicle prices also picked up slightly, but are not expected to be much of a hot spot for inflation, given the restocking of dealer inventories that we have seen in recent months and persistently weak sales. Indeed, core inflation remains below the Fed's 2% target on a year-over-year basis, and is likely to trend LOWER over the months ahead.

Separately, housing starts rose to 574,000 in November – up more than 8% after declining in October. Record low mortgage rates, high affordability and the recent extension of the first-time buyer tax credit are expected to buoy housing activity into the first half of 2010. The situation in the multi-family/commercial market, however, is expected to remain exceedingly weak. Indeed, many condos that were built or converted are expected to be re-converted back into apartments, where demand is stronger, in the months to come.

The Bottom Line: Recent economic data, including a surge in vehicle production, suggest that real GDP growth could easily exceed 4% (maybe even 5%) in the fourth quarter. Even then, growth is still a small fraction of what it should be, given the losses that we endured over the last two years, and inflation is still relatively tame. The result will keep the Fed dovish and on the sidelines as they conclude their Federal Open Market Committee (FOMC) meeting later today.

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