New Year, New Paradigms

As we settle into 2025, the economic landscape presents a fascinating puzzle of resilience and vulnerability. As of yesterday morning, the latest data from the Commerce Department indicates that U.S. retail sales rose by 0.4% in December 2024, reaching a total of $729.2 billion. This marks the fourth consecutive month of growth in retail sales, with a year-over-year increase of 3.9% compared to December 2023.

The digital transformation of retail continues unabated, with e-commerce ("nonstore retailers") now commanding more than 16% of total sales – more than doubling its piece of the pie compared to a decade ago, even after normalizing the COVID bump.

Diving deeper into the inflation narrative, we're witnessing a story of gradual but uneven improvement. While we've moved well past the acute phase of 2022, service sector inflation (excluding shelter) continues to run hot at around 4%.

The divergence in inflation components tells a complex story. While core inflation has shown signs of moderation, food and energy prices continue to exhibit significant volatility, creating challenges for both policymakers and consumers. The Atlanta Fed's sticky price measure and other core metrics like the median CPI at 4% and trimmed mean CPI at 3.2%, are suggesting a slower journey toward the Fed's 2% target.