Headline retail sales rose 0.3% in December, on top of a +0.2% revision to the November sales estimate. We routinely focus on a control sales measure which excludes sales at store types frequented by businesses as much as consumers: vehicle dealers, building material stores, service stations and restaurants. That more consumer-oriented control sales measure rose 0.5%, also with a +0.2% revision to the November sales estimate. The control sales measure is charted in both nominal and real terms in Exhibit 1.
It is clear there that underlying retail sales growth has been steadily positive for the last two years, and December certainly continued that trend. We had thought that slowing job/income growth and higher mortgage interest rates would exercise some restraint on consumer spending on merchandise, but that has failed to be the case as reflected by the retail sales data. And actual consumer spending data show similarly positive trends.
Across recent years, retail sales gains have typically been led by ''non-store retailers'' aka online vendors. That was not the case in December, as non-store retailer sales rose only 0.2% (of course, that slight gain came after much stronger increases in preceding months.) Rather, the December sales gains were led by strong increases at traditional brick-and-mortar holiday vendors, namely furniture stores (up 2.3%), book and hobby stores (up 0.4%) and apparel stores (up 1.5%). While the bookstore gains look transitory, furniture store sales have seen nice increases steadily since March, while apparel and department store sales have been inching up regularly as well.
Vehicle dealer sales are excluded from the control aggregate, but they have risen strongly each month since September. The only soft spots in the retail report were slight declines in drug store, restaurant and building material store sales. All in all, then, consumers look to have finished 2024 in good shape.
On the inflation front, yesterday’s December Consumer Price Index (CPI) report leaves us a lot closer to the Federal Reserve’s (Fed) 2% target than received wisdom generally realizes. While core CPI was up 3.2% year-over-year (YoY) earlier and core Personal Consumption Expenditures (PCE) was up 2.8%, most of that overage relative to the Fed’s 2% target was due to reported shelter costs. Net of shelter, core CPI was up only 2.1% YoY, with core PCE ex shelter up 2.4%.
Meanwhile, shelter costs continue to moderate. Shelter costs are reported as rising at just above a 3% annualized pace over the last four months, down from 5%-6% rates of increase in 2023 and early-2024. With ex-shelter core inflation much lower for over a year and shelter costs likely to continue to behave themselves, we still would be looking for overall core inflation to come in at the Fed’s 2% target in 2025, much earlier than the Fed’s own forecasts.