Hello, my friends!
In the week’s most anticipated economic data release, the Labor Department announced on Tuesday that the annual consumer price index (CPI), the nation’s most highest-profile inflation measure, landed at 2.7% on an annual basis in December. That’s neither faster nor slower than where it was in November, reminding us that while the worst price pressures may be squarely in our rearview mirror, realizing a return to the Federal Reserve’s 2% target level remains an ongoing challenge.
For the month, headline CPI rose 0.3% in December, a tenth of a point faster than November.
As for core CPI, which excludes more volatile food and energy prices, that climbed 0.2% for the month and 2.6% year over year in December. Both rates were unchanged from November.
Housing inflation remains a significant obstacle on the journey back to 2%. The shelter index, which makes up fully one-third of CPI, rose 0.4% last month and was up 3.2% year over year.
Commenting on the inflation report just after its release, Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, wrote:
“We’ve seen this movie before — inflation isn’t reheating, but it remains above target. There’s still only modest pass-through from tariffs, but housing affordability isn’t thawing. Today’s inflation report doesn’t give the Fed what it needs to cut interest rates later this month.”
Indeed, traders currently say there’s a 95% chance that Fed policymakers will keep the benchmark fed funds rate at the present level of 3.5% to 3.75% when they meet in the last week of January.
Retail Sales Rebounded in November
Also this week, the Commerce Department reported on Wednesday that retail sales jumped 0.6% in November, a sharp turnaround from October’s 0.1% decline and more proof of just how resilient the economy is despite pervasive uncertainty that includes ongoing tariff drama, deterioration in the labor market and persistent inflation.
The categories exhibiting the greatest sales strength were specialty shops (+1.9%), gas stations (+1.4%) and home improvement stores (+1.3%) while only two categories saw sales decline in November: furniture stores (-0.1%) and department stores (-2.9%).
Underscoring the “foundational” strength of consumer activity was the performance of the control group, a measure of retail sales that excludes select volatile categories including automobiles, gasoline, building materials and food services. The control group climbed 0.4% in November, which was far better than the 0.1% decline that economists expected to see.
The data for November, which had been delayed because of the government shutdown, makes clear that Americans are continuing to spend despite numerous economic headwinds. That bodes well for GDP (gross domestic product), which derives nearly 70% of its fuel from consumer spending.
What’s more, with tax refunds projected to be larger than normal this year, economists expect cash registers to continue ringing for some time to come.
“Early 2026 should remain robust as many households receive tax refunds that are $500 to $1,000 bigger than normal, giving that extra cash cushion for some purchases or to pay off credit card debt,” Heather Long, chief economist at Navy Federal Credit Union, said on Wednesday.
Small Business Owners Gain Confidence Heading Into 2026
In other news this week, a new report suggests America’s small business owners are entering 2026 feeling more positive than they have in months about the prospects for the nation’s economy.
On Tuesday, the National Federation of Independent Business (NFIB) reported that its closely watched Small Business Optimism Index ticked up by half a percentage point last month to land at 99.5, in line with economists’ projections and the metric’s highest level since August.
Notably, a key component measure, the Uncertainty Index, fell seven points last month to 84 to its lowest level in the last year and a half.
While remaining solidly below the 105.1 reached in December 2024 amid a surge in post-election confidence, the index has managed to stay resilient through business owner concerns about the potential impacts of President Trump’s dynamic tariff policy. In fact, since Trump’s reelection in November 2024, the index has dipped below its long-term average of 98 just two times, with December’s reading marking the 8th consecutive month the metric has landed above that figure.
In a summary statement on the data, NFIB chief economist Bill Dunkelberg said, in part:
“While Main Street business owners remain concerned about taxes, they anticipate favorable economic conditions in 2026 due to waning cost pressures, easing labor challenges, and an increase in capital investments.”
Wealthiest Americans Largely Supporting Economy, Fed Survey Finds
Finally, the Federal Reserve on Wednesday published the first of its eight Beige Books for 2026, which revealed that while economic activity across the country saw a slight uptick recently, much of that was attributable to spending by the wealthiest Americans.
Fed Beige Books…so named because of the color of their covers…contain more qualitative information about the condition of the economy across the central bank’s 12 districts. The information is gathered from interviews with business contacts and other key observers in each district, and published two weeks before each meeting of the policy-making Federal Open Market Committee.
The latest edition noted that economic activity recently increased at a “slight to modest pace,” adding:
“This marks an improvement over the last three report cycles where a majority of Districts reported little change.”
However, the summary also reflected persistent concerns that it’s the nation’s best-heeled citizens who are doing the thriving, while low- and middle-income Americans remain mired in uncertainty and instability.
“Several Districts also noted that spending was stronger among higher-income consumers with increased spending on luxury goods, travel, tourism, and experiential activities,” the report said. “Meanwhile, low to moderate income consumers were seen to be increasingly price sensitive and hesitant to spend on nonessential goods and services.”
The report also suggested that long-feared tariff-driven price increases which have failed to materialize are still a threat. Now that many industries have finally worked through much of the inventory they stockpiled prior to the imposition of tariffs, some companies are saying they expect to pass along higher goods costs to consumers in the coming months. The Boston Fed, for example, indicated that firms in its district are planning “selective price increases for the coming months, ranging from low single digits for pharmaceuticals to 5 to 10% for certain consumer products.”
That’s all for now; have a wonderful weekend!
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