Retail sales stay flat as inflation remains elevated

REAL ECONOMY BLOG | October 14, 2022

Authored by RSM US LLP

American consumer spending was unchanged in September, held back mainly by auto and gasoline sales as prices at the pump and auto dealers fell on the month, the Commerce Department reported on Friday. The data was not adjusted for inflation.

With inflation controlled for, sales volume was also flat despite inflation coming out hotter than expected, our estimate shows. Goods prices actually fell on the month, enough to offset the increase in the cost of food services.

Inflation-adjusted sales have remained stagnant since the middle of last year as the Federal Reserve has aggressively raised interest rates this year.

Stripping out the most volatile categories like gas, auto, food services and building materials, the control group—which feeds into the calculation of gross domestic product—rose by 0.4% on the month.

August’s reading was also revised up to 0.2%. That should give our forecast for GDP growth in the third quarter a slight boost from the current level of 2.5%.

The sales data most likely understated how solid American spending growth has been because most services were not included.

There are reasons to expect retail sales volume to grow faster in October and November as retailers have started to offer discounts geared to the holidays much earlier than in previous years because of excess inventories. Amazon’s second Prime Day of the year in October should also boost online sales.

The risk to the outlook continues to be inflation, especially the rebound in gasoline prices ahead of the winter as a cut in crude oil supplies by OPEC+ looms.

In recent months, whenever there has been an increase in gasoline prices, sales of discretionary items have fallen as consumers rationed their spending.

Inside the data

Inside the report, sales dropped in seven out of 13 categories, with the largest drops coming from miscellaneous stores and gasoline stations, down by 2.5% and 1.4%, respectively.

Sales rose the most at department stores and online, up by 0.7% and 0.5%, respectively. Despite Hurricane Ian, sales at restaurants rose by 0.5%, mostly because of price increases.