Whew – you could almost hear the sigh of relief from the financial markets when the December consumer price index (CPI) was reported this week. After a slightly warm PPI report the day before, data watchers were a bit on edge ahead of the Fed’s second favorite inflation indicator. All in all, the report was good. Headline CPI came in as expected for both the month and year-over-year, up 0.4% and 2.9%, respectively. Energy accounted for over 40% of the monthly gain in the headline number with the gasoline index rising 4.4%, its largest gain in a year.

The real relief was at the core level. Core CPI rose 0.2% for the month, the smallest increase in six months. The core year-over-year rate fell to 3.2%, the lowest level since April 2021, aside from a temporary dip last August. Prices for shelter, food and used cars and trucks posted gains, but at a slower pace than earlier reports. Airfares were one of the only categories to post a significant increase from the prior month, up 3.9%. Economists are holding on to the hope that the December PCE report will provide further evidence that disinflation is resuming. PCE is a blend of wholesale and consumer prices but carries a heavier weight for services and is timelier. The Federal Reserve favors the core PCE year-over-year index as a more accurate measure of inflation.

With everything seemingly moving in the right direction, this week’s inflation reports are not enough to push the central bank into cutting rates at the January meeting. The committee will want several months of data to prevent making a knee-jerk reaction. There are still a lot of unknowns regarding fiscal policy and the deficit to get through before declaring victory. 

Retail Sales – Retail sales rose 0.4% in December at both the headline and ex-transportation levels. While these numbers were lower than expected, the ex-autos subset was the best since September. Ten of the 13 categories in the index posted increases, including large gains at furniture, clothing and sporting goods stores. Auto sales increased 0.7%, boosted by President-elect Donald Trump’s threat to end tax credits for electric vehicles, as well as end-of-the year manufacturer incentives. Gasoline stations increased, mainly reflecting higher prices at the pump. Economists were most happy about the 0.7% increase in the control group, which removes volatile components and is a truer measure of consumer discretionary spending. December’s gain was the third largest monthly move in 2024. Overall, the report points to a consumer that held up well in the holiday season.

NOTE: Behind the Numbers  will not be published next week. The report will resume on January 31, 2025.