Inflation Measures Expected to Show Modest Rise in December

Inflation is expected to have been moderate in December, according to forecasts for two key indicators out this week.

On Wednesday, the government will report the producer price index for December, which is expected to have risen 0.6%. Stripping out the volatile food and energy sectors, producer prices are expected to have grown at 0.2%. The index, which tracks prices at the wholesale level, will be out at 8:30 am New York time.

Then on Thursday will be the consumer price index, which is expected to have grown 0.4%, in December. Excluding food and energy, the inflation measure is expected to be up 0.2%. The CPI will be released at 8:30 am New York time.

"From the economic perspective, because the Fed has been talking about inflation so much, CPI and PPI are probably taking on a little more importance than they have probably in the past," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale Illinois, in an interview with Reuters.

Inflation has remained above the Fed's comfort zone in recent months. Investors will be looking to see if the core inflation rate, or the core-CPI, begins to drift back to a 2% annualized gain as a result of fall-out from the drop in energy prices.

The stock market will probably weather any unexpected pick-ups in price pressures in these two inflation gauges, especially after last week's near 7% fall in the price of crude oil to 18-month lows below $55 a barrel.

Oil's Loss Is Economy's Gain

Merrill Lynch economist David Rosenberg said he expects the rapid decline in oil prices has likely given the economy a huge boost, possibly adding three-quarters of a point to the first-quarter gross domestic product.

"So who needs the Fed really in this environment because oil has had such an enormous impact that the interest rate equivalent is worth three interest rate cuts?" Rosenberg said.

Consumers are expected to see their lowest home heating bills in two years and the first year-over-year decline in five years, Rosenberg said. He estimates this could add 0.4% to consumer spending growth this quarter. On top of that, consumers also are seeing gas prices fall.

Despite the shortened trading week, there is a lot of information for the market to absorb.

In addition to the inflation data, investors will be looking for the Philadelphia Fed's index of business conditions in the Mid-Atlantic on Thursday. This take on factory activity will be looked at more closely in light of the Empire State report on Tuesday, which was much weaker than expected.

On Friday, the University of Michigan's releases its preliminary read on consumer sentiment. There is also data on housing starts, the NAHB housing index, and the Conference Board's leading indicator this week. In addition, the Federal Reserve's report on industrial production will be out on Wednesday at 9:15 am.

U.S industrial production is estimated to have risen slightly in December, after a modest gain in November.

On average, production from the nation's mines's utilities and factories is expected to have grown 0.1% in December, after a 0.2% increase in November.

Capacity use is estimated to have remained at 81.8% in December, according to average analyst estimates.

Bernanke Before Senate On Thursday

Eight Fed speakers, including Chairman Ben Bernanke, will make the rounds this week as well. Bernanke will be speaking at 10 a.m. on Thursday before the Senate Budget Committee.

"While we do not expect to hear anything different from recent Bernanke speeches, we will be looking for any slight changes in tone or nuances he might offer in his commentary on inflation, the housing situation, employment and new economic trouble spots, if there are any," said Fred Dickson, chief market strategist at D.A. Davidson & Co. "Coming during the bulk of earnings season, this speech could have some market-moving impact if he chooses to change his tone."

In total, more than 50 Standard & Poor's 500 Index compaines will report this week.

Also on Thursday, the Bank of Japan will make a decision on interest rates. According to Merrill's Rosenberg the futures recently were pricing in 76% odds of a 25 basis point interest rate hike.