Two of the three major inflation measures (CPI, PPI, PCE) were reported this week. If you didn’t know, the Consumer Price Index (CPI) is made up of several components but the largest weighting is shelter at 35.5%. So, unless rents and housing prices fall significantly I wouldn’t expect to hit the 2% target set by the Fed in 2026. The read for the CPI was 2.7% for December and you can see below we have not been sub 2% since February of 2021.
The Producer Price Index (PPI) released on Wednesday was 3% and higher than expectations of 2.7%. The PPI is more complex than the CPI because it’s organized in multiple ways and covers the entire production chain. Sometimes it is easier to look at a picture and below is the year-over-year change in the PPI. As you can see, there was a low in 2023 and has been trending higher as we normalize post COVID (and tariffs).
Other Economic Notables
As a consumer, it is depressing to see this kind of price data. However there were some bright spots this week:
- Core retail sales (excluding autos, gas, restaurants) also up 0.4% monthly and 4.2% year-over-year. This shows our consumer led economy remained solid thru the holiday season.
- Atlanta Fed GDP Now is a real-time measure for estimating GDP which is now running at 5.3%! The improvement is due to a narrowing trade deficit which is likely attributed to our current tariff policies.
- Jobless Claims is a weekly measure aggregated from each state which was reported at 198,000 this week which is extremely low and evidences good labor demand.
The economic data paints a picture of resilient growth, persistent but moderating inflation, strong consumer spending through the holidays, and stable employment with historically low layoffs. Not bad.
The Outlook For Interest Rates
The Fed faces a “high-class problem”—the economy is too strong to justify aggressive rate cuts, but inflation remains above target. Expect “higher for longer” to remain the baseline, with perhaps 1-2 cuts in 2026 rather than the 3-4 the market was hoping for just a few months ago. The stagflation fears have eased, but we’re not out of the woods just yet.
Below is a chart of the yield on the 10Yr Treasury bond (assuming constant maturity). Ignore the labeling (for now) and pay attention to the orange lines which show that we have been rangebound from 4.0%-4.5% since 2022.
If 5% GDP continues then I expect we should see a breakout of this range to higher yields – maybe closer to 5%.If we look at the SHAPE of the yield and include all tenors we see something different below. The yield curve has steepened in anticipation of a high(er) growth environment where elevated inflation levels are common.
Bond investors interpret a steep yield curve as a ‘normal’ shape where the economy grows and banks are motivated to lend at longer tenors to capture higher returns.
Checking IN On Stocks
The S&P 500 has been trading in a range since last October and is challenging overhead Fibonacci resistance at 6975. Perhaps, some consolidation is needed after a sharp rebound from the April 2025 low. There is definitely sector rotation going on and lately the breadth of the market has been improving which evidences more stocks are rising which aligns with the improved GDP outlook.
Earnings will be the focal point for investors over the next three weeks plus don’t forget the Fed meeting on the 28th which should be interesting. The outlook from CEOs should help set the tone for this year.
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President, Kisco Capital
