Honestly, if you looked at consumer sentiment surveys right now, you’d think we were collectively hiding under our beds. People are anxious. Between the headlines about tariffs and the general feeling that a trip to the grocery store requires a small loan, the vibes are, well, not great.
But then you look at today's US economic data, and the numbers tell a different story. They show a consumer that is grumbling but still swiping their card.
The big news this Wednesday morning came from the Commerce Department. Retail sales for November—which were delayed because of that 43-day government shutdown—finally hit the wires. They rose by 0.6%. That's actually better than what most of the smart folks on Wall Street were expecting. They were looking for something closer to 0.5%.
The disconnect in your wallet
Why does it feel so weird? Basically, because where we are spending has shifted. We aren't buying couches. We aren't really doing big home renovations. Sales at furniture and home furnishing stores actually dipped 0.1%. People are holding off on the big stuff.
But we are apparently still very interested in hobbies and looking good. Sporting goods and hobby stores saw a massive 1.9% jump. Clothing and accessories? Up 0.9%. Even restaurants—the only service category they track in this specific report—saw a 0.6% uptick.
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It's a "treat yourself" economy born out of exhaustion.
Inflation is sticky, not scary
Then we have the inflation side of the house. Yesterday’s Consumer Price Index (CPI) report for December confirmed what many of us felt: prices aren't skyrocketing like they were in 2022, but they aren't exactly falling back to "the good old days" either.
The annual inflation rate held steady at 2.7%.
That’s exactly where it was in November. It’s like the economy is stuck in a holding pattern. The Federal Reserve wants it at 2%, and we just aren't there yet.
Here is the breakdown of what is actually getting more expensive right now:
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- Natural Gas: Up over 10% in the last year. If your heating bill felt higher this month, you aren't imagining it.
- Groceries: Still rising sharply, specifically in categories like meats, poultry, and fish (up 3.9%).
- Electricity: Climbing as we use more natural gas to generate power.
On the flip side, some things are actually getting cheaper. Used cars and trucks fell 1.1% in the last month. Gasoline at the pump also saw a slight dip, though that was offset by those higher utility bills.
What the Fed is thinking
All of this puts the Federal Reserve in a tough spot. Jerome Powell’s term is ending in May, and there’s a lot of chatter about who takes over next. Whether it’s Kevin Hassett or Kevin Warsh, the "two Kevins" as they're calling them, the next leader is going to inherit a messy desk.
Right now, the Fed is looking at a labor market that is "softening." That’s economist-speak for "it’s getting harder to find a job." We only added about 50,000 jobs in the last report, and unemployment is sitting at 4.4%.
They’ve cut rates three times in a row since September. But with inflation still clinging to that 2.7% mark, they might just hit the pause button at their meeting later this month. Most traders are betting heavily—like, 95% certainty—that rates will stay exactly where they are for now.
The "K-Shaped" reality
We have to talk about the elephant in the room: not everyone is feeling this 0.6% retail boost.
Recent data from the Dallas Fed suggests that the top 20% of earners are now responsible for a record 57% of all consumer spending. The bottom 80%? They’re the ones struggling to make ends meet as tax refunds haven't hit yet and "inflation fatigue" sets in.
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It’s a divided world. If you have a solid stock portfolio, you’re probably feeling okay. If you’re living paycheck to paycheck, a 10% hike in your heating bill is a genuine crisis.
What you should do next
Don't let the "better than expected" headlines fool you into overextending. The economy is resilient, but it’s also fragile.
Watch your utility contracts. With natural gas and electricity prices spiking, now is the time to see if you can lock in a fixed rate or look into energy-saving credits that might be available through 2025 tax expansions.
Wait on the big purchases. Since electronics and furniture sales are flat or declining, retailers are likely to get aggressive with promotions in the coming months to clear out inventory. If you don't need that new sofa today, wait until the President's Day sales or early spring.
Adjust your withholding. Larger-than-normal tax refunds are expected in early 2026 due to the 2025 tax cut expansions. If you find yourself with a massive refund, it means you gave the government an interest-free loan all year. Consider adjusting your W-4 so you get that money in your paycheck now when you actually need it to cover those higher grocery bills.
Keep an eye on the Fed. The next interest rate decision on January 28 will signal if they are more afraid of a recession or more afraid of inflation. If they pause, don't expect mortgage rates to drop significantly anytime soon.