U.S. consumer price data released today supports the Federal Reserve Board’s message that the U.S. economy is in the midst of a period of non-inflationary growth that should persist through 2004, TD Bank Financial Group said in a report.

U.S. consumer prices rose 0.2% in December after falling 0.2% in November. Excluding food and energy, CPI edged up 0.1% last month after dropping 0.1% in the prior month. This came despite higher medical costs, which jumped 0.6%. For the full year, total CPI gained 1.9%, down from 2002’s 2.4% increase. Core prices rose just 1.1% last year after increasing 1.9% in 2002, the smallest gain since 1.0% in 1960.

TD Bank economist Gillian Manning said one reason the inflation outlook remains so benign even as growth picks up is the persistent slack in the U.S. economy, which has also been evident in the labour market. “With jobless claims continuing to plummet – the four-week moving average fell below 350,000 today for the first time since 2001 – the employment outlook is brightening, but at a painfully slow pace,” Manning said in a report.

Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., said higher inflation lies down the road “given the weaker U.S. dollar, a rise in commodity prices and a strengthening economy. However, it will take several months even to prove core inflation has stabilized near 1%. The low inflation trend remains very helpful for the bond market.”

Leslie Preston of CIBC World Markets said there were few Christmas surprises in December’s CPI report, noting that energy prices, which reversed direction and rose in December, and higher food prices were the main culprit behind the headline increase. “Despite the weakened US$, the inflationary effects seen in yesterday’s producer price report are not yet translating into much heat in consumer prices, with commodities prices in the CPI (less food) down 1.4% year-on-year.”

Manning said that today’s CPI data, together with a report that U.S. retail sales rose by a respectable 0.5% the month, is another indication that the U.S. economy remained on solid ground in the final month of 2003, with no inflation to speak of on the horizon.

“December’s retail sales report was on the soft side, with a 1.6-per-cent increase in sales of automotive vehicles and parts driving much of the 0.5% gain in total sales,” Manning said. “Excluding autos, retail sales rose by a much weaker 0.1%. However, that disappointing result was driven primarily by a big drop in sales at food and beverage stores (down 0.7% for the month) and a smaller drop in gasoline station receipts (down 0.4%).

“Looking beyond those components, a number of other categories recorded respectable gains for the month, implying that consumer spending still had some momentum going into year-end. And, with second-round effects from the 2003 tax package expected to boost sales again in early 2004, the overall picture suggests that U.S. consumers remain in good form.”

Preston said with core inflation the lowest in 38 years, the Fed “can certainly afford to wait for a sustained employment turnaround before they even need to consider squeezing the monetary brakes.”