INFLATION
The Consumer Price Index (CPI) rose 0.4% in December. The core CPI, which excludes food and energy, rose 0.2%. Year-over-year, consumer prices are up 2.9% while the core CPI has risen 3.2%. Producer prices (PPI) were up 0.2% in December and are up 3.3% over the last twelve months.
Our Take: The December core CPI was lower than expected. Rates fell dramatically in response, as market participants priced in the increased possibility of more Fed cuts. However, inflation remains above the Fed’s 2% target and the chance for a rate cut following the January Federal Open Market Committee (FOMC) meeting is remote. The Fed will likely require further proof of progress in their battle against inflation before being confident to reduce rates.
RETAIL SALES
Retail sales rose 0.4% in December, underperforming expectations for a 0.6% increase. The retail sales control group, which feeds GDP calculations, increased 0.7% versus expectations of a 0.4% increase.
Our Take: Even with December’s headline underperformance, retail sales were strong in 2024. Part of this is due to continued inflation, as retail sales are reported in nominal terms. Adjusting for inflation, real retail sales rose by approximately 2% for the year. Currently, consumers appear to be in good shape. Looking forward, growth in real sales will depend in large part on the strength of the labor market.
CHINA
The Chinese government published a 2024 GDP growth rate of 5%, exactly in line with the stated goal for the year. Many economists expressed doubt in the number given other economic indicators that are not consistent with it. The nominal growth rate was 4.2% and deflation increased the headline number to 5%. China’s population shrank for the third straight year in 2024.
Our Take: Regardless of the veracity of the 5% GDP print, the Chinese economy is facing many headwinds that are likely to restrain global growth rates.
MUNICIPALS
S&P Global Ratings downgraded Chicago’s credit rating by one notch, from BBB+ to BBB with a stable outlook. S&P cited the city’s “sizable structural budgetary imbalance” and noted that this “will make balancing the budget in 2026 and outyears more challenging.” Chicago Mayor Bradon Johnson disagreed with the downgrade, stating that the S&P report “does not accurately reflect our fundamental economic strength and the steps we’ve taken to address legacy issues.”
Our Take: This week’s downgrade should not come as a surprise. Chicago continues to struggle with rising wages, pension costs and debt. S&P Global Ratings had put Chicago on negative watch in November, which was a warning that a downgrade could occur. During the budgeting process, Mayor Johnson’s $300 million property tax proposal was unanimously rejected by the City Council last year, which led to other tax and fee increases to help fill the growing budget gap. Mayor Johnson and city leaders have more work to do to address the deficit.