-- by CHRISTOPHER ANSTEY --
WASHINGTON (AFX) - U.S. retail sales unexpectedly rose in December, but underlying weakness in the report, along with generally benign producer prices, reinforce expectations that the Federal Reserve will again cut interest rates at its Jan 30-31 policy meeting, analysts said.
"The two reports pretty much confirm what the Fed has been thinking, and don't change our forecast for a cut of 50 basis points at the FOMC meeting, although they could go 25 (basis points)," said Robert McGee, chief economist at Tokai Bank.
The Commerce Department earlier reported that retail sales rose 0.1 pct in December, against expectations for a 0.4 pct decline. Excluding autos, retail sales were unchanged in December, slightly lower than expected. "Clearly these headlines will assuage some of the fears of a consumer collapse, and they mean the Fed will wait till the meeting before easing again. We still look for at least 25 basis point (cut) on Jan 31," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in a research note.
"I think the numbers are a little bit confusing, because nobody expected auto sales to increase," McGee said.
Sales of more expensive vehicles, such as sport-utility vehicles, accounted for the rise in auto sales, analysts said.
"I assume it is new model year units being introduced, with higher prices," said Brian Fabbri, chief economist at Paribas Capital Markets.
"December (retail sales) is clearly a weak report, and could be revised downward," Fabbri said.
McGee noted that auto sales for the previous two months were revised downward.
For the fourth quarter, retail sales were the weakest since the last recession in 1990, McGee added, saying "it confirms the picture of an economy being on the edge of recession."
The Labor Department earlier reported that the PPI was unchanged in December from a month earlier, while the core rate, excluding food and energy prices, rose 0.3 pct.
The overall decline was the weakest since August, but the core rate rose at the fastest pace since May.
The rise in the core rate did not prompt analysts to change their assessment of benign core prices, however.
"Overall, PPI remains benign; the bad bits in the report today look unsustainable," Shepherdson said.
McGee said that "core PPI prices are kind of a lagging indicator. The fact that the crude goods prices, excluding food and energy, were unchanged will be promising to (the Fed)."
The headline PPI was affected by a large decline in gasoline prices, but these were partly offset by a record increase in residential natural gas prices.
This rise in natural gas prices could have a depressing effect on consumer spending going into the first quarter, McGee said.
"Natural gas is the primary fuel for electricity generation, and has the most impact on consumers' budgets," McGee said.
However, analysts said the fact that retail sales were not as weak as expected could ease the pressing need for the Fed to cut rates aggressively.
"The fact that the reports were not dramatically lower as was expected probably takes a little bit of the edge off of the Fed's need to move aggressively at the end of the month," Fabbri said.
"It means it's more likely they'll cut by 25 instead of 50 (basis points)," he concluded.