US retail sales rose sharply in December.

WASHINGTON (Reuters) – U.S. retail sales rose sharply in December, signaling strong demand in the economy and further reinforcing the Federal Reserve’s cautious approach to cutting interest rates this year.

Retail sales rose 0.4% last month after a revised 0.8% increase in November, the Commerce Department’s Census Bureau said on Thursday.

Economists polled by Reuters had forecast retail sales, which are mostly goods and not adjusted for inflation, rose 0.6% after a 0.7% rise in October.

The report followed last week’s news of an increase in non-farm payrolls and a drop in the unemployment rate to 4.1% from 4.2% in November. While inflation eased in December, overall consumer prices rose the most in nine months.

The U.S. central bank forecast just two rate cuts this year, down from four planned in September when it kicked off its policy-making cycle. That’s in recognition of the risks posed by President Donald Trump’s sweeping tariffs, mass deportations of undocumented immigrants and tax cuts that economists warn are inflationary.

Labor market resilience is pushing up spending with strong wage growth. Household balance sheets are also in good shape, although lower-income consumers are struggling.

The Fed is not expected to cut rates this month. The overnight interest rate has been reduced by 100 basis points to 4.25%-4.50%, with an increase of 5.25 percentage points in 2022 and 2023.

Retail sales excluding automobiles, gasoline, construction materials and food services rose 0.7% last month after a 0.4% increase in November. These so-called primary retail sales are closely related to the consumer spending component of GDP.

The Atlanta Fed is currently forecasting GDP growing at a 2.7% annual rate in the fourth quarter.

The economy grew at a rate of 3.1% in the July-September quarter, which is higher than the 1.8% rate that Fed officials consider as a non-inflationary growth rate.

(Reporting by Lucia Muticani; Editing by Chizu Nomiyama)