Retail Sales End 2024 on a Strong Note as Core Inflation Eases

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Key Takeaways:

• Retail sales and food services increased 0.4 percent in December, according to the Census Bureau. While sales at building materials, garden equipment and supply dealers (-2.0 percent), and bars and restaurants (-0.3 percent) contracted, most other major categories posted strong gains. Control group retail sales (excluding food service, auto, building supplies, and gas station sales), which feed directly into the Bureau of Economic Analysis’s (BEA) estimate of personal consumption expenditures, rose a robust 0.7 percent over the month.
• The Consumer Price Index (CPI) increased 0.4 percent over the month in December, the largest gain since March, according to the Bureau of Labor Statistics (BLS). The high reading was due almost entirely to a 4.4 percent surge in gasoline prices; excluding the volatile food and energy categories, core CPI increased 0.2 percent. Compared to a year ago, headline CPI moved up two-tenths to 2.9 percent, while core CPI ticked down one-tenth to 3.2 percent. Rent of primary residence and owners’ equivalent rent (OER) both decelerated by one-tenth to 4.3 percent and 4.8 percent compared to a year prior, respectively.
• The Producer Price Index (PPI) increased 0.2 percent over the month in December and rose 3.3 percent compared to a year prior, the highest annual reading since February 2023, according to the BLS. The gain was due in part to a 3.5 percent jump in energy prices. Excluding food, energy, and trade services, core PPI increased 0.1 percent over the month and 3.3 percent compared to a year ago.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 3.4 points to 105.1, the highest level since 2018. The largest driver in the improvement in sentiment was a 16-point jump in the share of firms expecting the economy to improve, which at 52 percent was the highest level since 2002. However, plans to increase employment or make capital outlays were little changed.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 1 point to 47 in January. The index for single-family sales in the present rose 3 points to 51, while the index for sales in the next six months declined 6 points to 60. The index for the traffic of prospective buyers rose 2 points to 33.

Forecast Impact:

The robust gain in control group retail sales, which feeds directly into the BEA’s estimate for personal consumption expenditures, is in line with earlier estimates that suggested holiday shopping activity was strong and supports our forecast for above-trend consumption growth in 2024 Q4 and into the first quarter of 2025. On the inflation front, looking past the jump up in oil prices (and the related 3.9 percent monthly increase in airline fare, which boosted the core inflation reading a bit), December was an encouraging core CPI report. Measures of core services inflation, including shelter, showed signs of slowing, supportive of our forecast for a gradual decline in core inflation in 2025. Core PPI also registered its second consecutive 0.1 percent monthly gain, pointing to cooling in that measure as well.

The increase in the NAHB survey is supportive of our forecast for comparative strength in new home sales and single-family starts in 2025. Both indices for current sales and sales in the next 6 month were over the expansionary threshold of 50 this month, indicating that homebuilders expect to be able to move their current inventory of new homes available for sale.

Nathaniel Drake
Economic and Strategic Research Group
January 16, 2025

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