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Retail Sales Slump

November retail sales (including food services) dropped 3.7%, while the ex-auto aggregate decreased 0.5%. The figures were roughly in line with expectations.

The big story in the report was the huge pullback in the auto sector to a more sustainable level following the near-record surge seen in October. The motor vehicle and parts component dropped 11.9% following the downwardly revised 24.2% jump in October.

As for ex-autos, leading the weakness was gasoline service stations, which dropped 6.3% on another big-price related decline. We wouLd also note that many retailers in their monthly update indicated that sales of seasonal related items were also damped by unusually warm weather on the month, although it is not possible to see this within the components.

Overall, we have seen sizable gyrations in the headline figures over the past three months, which has made it difficult to gauge underlying trends. Nonetheless, despite the weakness in the headline figures, today's data still support the view that real consumption in the fourth quarter should manage a respectable gain in the neighborhood of 2.5%-3.0%.

PRODUCER PRICE INDEX. The November overall PPI dropped 0.6%, while the core rose 0.2%. Overall, the headline figure is consistent with weak pricing pressure, led by big declines in both energy and food.

The energy aggregate dropped 3.8%, led by a 10% drop in gasoline prices along with ongoing weakness in the price of other related products. Food prices dipped 0.8% following a 0.4% decrease in October, with beef & veal prices falling 6.3% and vegetables off 3.2%.

As for the core, capital equipment prices rose 0.1% and core consumer goods increased 0.3%. Both of these components were boosted by a 0.9% rebound in the price of autos following the hefty 4.7% drop in October. Core consumer goods were also boosted by a 1.9% gain in the price of cigarettes.

Overall, despite the rise in a few core components, the overall tone of the report is still one dominated by disinflation with some pockets of deflation -- there are few signs of inflation. This friendly price backdrop gives the Fed more flexibility in addressing the downside risks to growth. Today's data also suggest we should see a similar pattern in the CPI. from Standard & Poor's Global Markets

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