• INDICATOR: December Retail Sales and Producer Prices
• KEY DATA: Sales: +0.6%; Excluding Vehicles: +0.2%/ PPI: +0.3%; Non-Food and Energy: +0.2%
• IN A NUTSHELL: “Consumers spent moderately, but inconsistently in December. ”

WHAT IT MEANS: Incomes are starting to rise faster and optimism is soaring, but that didn’t mean that households shopped ‘till they dropped in December. Yes, retail sales were up sharply, but that was because vehicle purchases jumped. Excluding SUVs and autos, consumption rose somewhat modestly. Indeed, if you take out the rise in gasoline that was due to price increases, spending didn’t do a whole lot. Basically, for every solid sector there was a weak link. Bad winter weather helped propel sales at the building materials stores, but demand was down at department stores. A jump in furniture demand was offset by a fall off in food and beverage stores and restaurants. Indeed, it looks like the bloom is totally off of the restaurant industry as sales have fallen recently and the gain over the year has been cut more than in half. If we bought electronics and appliances, it was not at the bricks and mortar stores, as they were off. At least we hit the Internet hard.

On the inflation front, wholesale costs rose moderately, led by large increases in food and energy. Price increases for goods have been accelerating but interestingly, services costs have cooled a touch. That has kept producer expenses from rising sharply and holds out hope that inflation will not accelerate significantly. But future wholesale cost increases look like they are coming. Intermediate costs have been up solidly for several months now. The increases are spread across most sectors. That is true of crude materials costs as well.

MARKETS AND FED POLICY IMPLICATIONS: Fourth quarter GDP should be reasonably solid, but today’s retail sales numbers were disappointing, at least to me. Maybe the surge in confidence will ultimately turn out to be the primer for strong household consumption, but the latest polls on both confidence and the transition don’t indicate the euphoria is building. And then there is inflation, which is likely to keep rising on a fairly consistent basis. The Fed’s inflation target is in sight if not already here. Another strong wage number and inflation above the 2% rate would force the Fed to take action. I have them moving next in May, but it could come sooner if there is a quick move to cut taxes and spend more money on infrastructure. Ultimately, economic growth comes down to income gains and realistic expectations that investments will pay off. Capital spending driven by tax decisions have only short-term impacts. One more week to the inauguration and then the rubber will really start hitting the road. We will soon see if Congress does more than simply start the process of cutting taxes, reducing the regulatory burden and repealing and replacing Obamacare simultaneously. This spring should be really interesting.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.