Consumers End the Year on a Strong Note

Consumer spending was widespread in December which means retailers ended the year with a gleeful holiday season.

December retail sales rose 0.4% after being revised up yet again for the previous month. That underscores the glee retailers have been reporting following the holiday season, one of the best in a very long time.

Spending gains were widespread with the exception of sporting goods and department stores. Big-box discounters’ sales did much better than traditional department stores’, which anyone who went into one last month noticed.

Sales increases were strongest for online spending and building materials stores. That reflects the shift from bricks to clicks, repairs following the severe fires in California and an emerging boom in remodeling. A dearth of move-in quality houses for sale has forced many buyers to invest in properties that need a lot of work. This is at the same time that many existing homeowners are opting to add on instead of trading up in a market with little selection and escalating prices. Home values have continue to rise nearly three times the pace of overall inflation.

We spent more on eating and drinking out, part of the strength we’ve seen in travel spending. Consumers were able to afford to travel to and away from their families during the holiday season. The only glitch was heavy storms during the first week of January, which likely delayed some vacationers from returning home. Most of those losses were recouped as the storms abated, particularly in the South.

December’s Consumer Price Index (CPI) rose 0.1%, slightly weaker than expected. Year-over-year gains moderated by 0.1% to a 2.1% pace. That was the primary reason for the moderation in overall inflation. We expect the drop in energy prices to reverse as we move into January.

Core CPI (excluding food and energy) rose 0.3%, slightly more than expected. Year-over-year gains edged up 0.1% to 1.8%. That is welcome news to many on the Federal Reserve who are looking for a warming trend in inflation. They watch core inflation closely, as it is the best predictor of overall inflation.

Notable increases in the core measures of inflation included prescription drug prices and the cost of vehicle insurance. (Damages created by last year’s hurricanes and devastating fires will be pushing up insurance costs for all of us.)

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