Economic Double-Take

Rising CPI, Falling Retail Sales

There were two pieces of news this past week that I really think set a potentially negative tone for the weeks ahead.

The first and maybe most concerning was the January CPI report. Inflation in the U.S. rose 0.5% month-over-month. That brings the annualized rate up to 3% for the first time since June and up from 2.4% back in September. Based on recent history (and barring any big surprises), it looks like the inflation rate could hold steady around this level for the next few months before rising again starting around May and continuing through the summer. On the plus side, the core inflation rate held steady at 3.3%, indicating that the biggest price increases are coming in the volatile food and energy spaces. The core piece at least seems to be moderating, even if it’s not going down, and that’s been the larger problem for the U.S. economy over the past few quarters. With tariffs looming, even if we don’t know what’s ultimately going to be implemented and what isn’t, it’s looking like inflation will be sticky at best and rising at worst as we move further into 2025.

The other is the big drop in retail sales in January. The -0.9% change compared to the month prior is the largest since early 2023. Even though we’ve heard a lot about the pressure that consumers are under due to elevated inflation, retail sales and consumer spending have been the thing that’s held up the U.S. economy throughout. If this starts breaking down, it may not have much left holding it up. It’s worth noting that there was a big January drop last year as well, potentially because of the post-holiday letdown. Plus, the September to December 2024 period saw monthly gains of 0.9%, 0.6%, 0.7% and 0.7%, respectively. Prior to this month, retail sales growth looked very healthy, so we should probably hold off on declaring that conditions are materially weakening until we get a little more data.