U.S. retail sales rise amid sustained inflation and rate hikes

U.S. consumers rebounded from a weak holiday shopping season last month by increasing spending in stores and restaurants at the fastest pace in nearly two years, underscoring the economy’s resilience in the face of rising prices and multiple interest rate hikes by the Federal Reserve.

The government said on Wednesday that retail sales rose 3% in January, after sinking the previous two months. This is the largest one-month increase since March 2021.

The growth was fueled by a jump in auto sales, as well as good spending at restaurants, electronics stores and furniture stores. Some of the supply shortage that had held back car production has eased and more cars are gradually moving into dealership lots. Expanded inventories allowed dealers to meet more of the country’s pent-up demand for the vehicles.

Strong retail sales numbers for Wednesday, coupled with a strong jobs report for January, suggest that the economy remains sustainable, perhaps even strengthening, and with little risk of succumbing to a recession anytime soon. Earlier this week, economists at Goldman Sachs cuts the likelihood of a recession this year from 35% to just 25%.

However, strong consumer spending could also put upward pressure on inflation. The latest measure of consumer inflation showed that it fell slightly year-on-year in January, but rose sharply from December to January.

The combination of strong spending and hiring will likely also increase pressure on the Federal Reserve to further raise its benchmark interest rate. The Fed has already signaled that it plans to make two more quarter-point hikes, in the range of 5% to 5.25%, which would be the highest level in 15 years. On Tuesday, Deutsche Bank said it expected the Fed to add two more hikes this year, in a range of 5.5% to 5.75%.

Wednesday’s retail sales figures showed that restaurant spending jumped 7.2% in January, an increase which, in part, may have reflected warmer than usual weather. Over the past year, restaurant spending has increased by more than 25%. The retail sales report is not adjusted for inflation, so part of this increase reflects higher prices. According to the government’s inflation report, restaurant prices rose 8% last year.

If US shoppers can continue to spend quickly, that will help determine how the economy fares. The eight interest rate hikes the Fed has made in the past year have pushed up the costs of mortgages and auto loans, as well as credit card interest rates. Inflation also eroded workers’ wages, limiting their ability to spend freely.

Yet despite all the challenges, consumers continue to show resilience. Several factors likely helped boost spending last month. Some 70 million recipients of Social Security and other government retirement programs received an 8.7% increase in their benefit checks last month, an annual cost-of-living adjustment to offset inflation. This is the largest such increase in 40 years.

The labor market also surged in January, with nearly half a million new jobs added. The unemployment rate hit 3.4%, its lowest level since 1969. With many companies still eager to hire and retain workers, average wages and salaries increased by approximately 5% compared to a year agoone of the fastest rates of increase in decades.

These increases have generally been swallowed up by inflation. However, consumer price inflation has slowed. And for many households, a sharp drop in gas prices since the summer has freed up more money to spend.

As price increases slowed, average wages outpaced inflation within months, giving some consumers additional purchasing power.

On Tuesday, the government announced that inflation fell again in January from a year earlier, the seventh consecutive such decline, to 6.4% from 6.5% in December. But on a month-to-month basis, price increases accelerated in January compared to November and December, showing that high inflation will not be defeated quickly or easily.

(with information from AP)

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