3 Numbers to Watch: German and UK inflation, US retail sales

Inflation reports are due today for Germany and Britain, followed by the first broad review of consumer spending in the US for December.

German Consumer Price Index (07:00 GMT) Inflation jumped sharply in December, according to the preliminary estimate from Destatis, the German state statistics agency. This is probably a one off, though we are unlikely to see a major revision in today's final read on December consumer price inflation.

Nonetheless, the hefty increase in December inflation raises questions about what is in store for prices amid so much news of sluggish German growth and much deeper problems throughout Europe. The 0.9 percent rise in the flash estimate for CPI in December is the highest monthly increase in two years. Meanwhile, the preliminary estimate of a 2.1 percent annual increase through December—the fastest pace since last August—is again above the European Central Bank's stated two percent ceiling.

Analysts blame a surge in food prices for the unusually big jump in inflation. But the optimistic view is that this is only temporary. “We’ve seen massive increases in food prices in December which are interrupting the gradual decline of inflation rates,” one economist tells Bloomberg. “I wouldn’t exaggerate this development. Inflation should continue to moderate if energy-price driven costs ease further.”

Indeed, yesterday's update on wholesale inflation provides some support for the moderation scenario: prices for wholesale trade were flat in December on the previous month, according to Destatis.

UK Consumer Price Index (09:30 GMT) Consumer price inflation has exceeded the Bank of England's two percent target for three years, and it is a safe bet that today's update will provide more of the same. CPI rose 2.7 percent for the year through November, matching October's pace. Analysts warn that inflation will creep higher, approaching 3 percent in the near future. Today's update on CPI for December will offer some context for deciding if that outlook has any support.

The market expects that UK inflation will increase at a faster pace in December: 0.5 percent versus 0.2 percent in November, according to the consensus forecast of economists. Even if that turns out to be accurate, the annual rate will likely remain at 2.7 percent. But with monetary policy makers increasingly worried about pricing pressures, an uptick in the monthly number would only strengthen the BOE's current preference for keeping additional quantitative easing on hold.

But then there is the complicating factor of sluggish growth. "The Bank of England certainly isn't going to raise interest rates any time soon given the economy's extended weakness and limited recovery prospects in the face of a tight fiscal squeeze and serious problems and uncertainties in the Eurozone," one dismal pundit advised last week. Fair enough, although a firm inflation report in today's update also increases the odds that the Old Lady of Threadneedle Street isn't going to cut rates in the near future either.

US Retail Sales (13:30 GMT) Today's report will provide the first look at how consumer spending overall fared in December, a month that was burdened by the anxiety and uncertainty of the fiscal cliff debate that raged in the final weeks of the year. The consensus forecast sees a 0.2 percent rise. My own brand of econometric modeling suggests a slightly higher gain of 0.3 percent, based on the average point forecast from several models.

A gain for December retail sales would further undermine the warnings from some analysts that the US economy is weakening. For the moment, however, there's not much support for a bearish read on macro conditions. Several previously released indicators for December suggest that the year ended on an upbeat note for the US. The manufacturing and services sectors showed a bias for growth last month, according to the Institute of Supply Management (ISM) indexes. Payrolls continued to grow at the tail end of 2012 too.

Another data point in the positive column for December in the all-important consumer spending category would strengthen the case for arguing that the US economy remains on a path of modest growth. There's a decent chance that today's retail sales report will confirm no less.