U.S. retail sales and producer inflation fall as spending weakens

REAL ECONOMY BLOG | January 18, 2023

Authored by RSM US LLP

Retail sales and producer inflation data came in lower than expected in December, giving the Federal Reserve more reasons to begin to slow down its rate hikes.

Sales at retail stores and online showed broad declines in the last month of the year, dropping by 1.1%. November’s number was also revised significantly lower to a 1.0% decline from a 0.6% decline earlier, the U.S. Census Bureau reported on Wednesday.

The broad decline in sales was driven mostly by the sharp drops in auto and gasoline sales. Auto sales posted a 1.2% decline compared to November, while gasoline sales fell by 4.6% on the month.

More important, sales of the control group—which strips out the most volatile components and feeds into the government’s estimate of gross domestic product—also showed a big drop on the month with a 0.7% decline.

While that suggests a downside risk to our GDP estimate of a 2.5% increase in the fourth quarter, it is important to keep in mind that retail sales mostly cover goods except for food services.

Producer prices

Some of the decline was because of falling prices of goods. In a separate report from the Bureau of Labor Statistics, prices received by producers for all demand fell by a monthly 0.5% in December, while prices for goods demand declined by 1.6%.

But even after adjusting for falling inflation, retail sales volume was still in negative territory. Our estimate pointed to a 0.2% drop in sales volume on the month. That was the second month in a row that sales volume fell on a monthly basis.

Weakened sales and prices are signs that the Fed’s rate-hike campaign is achieving the goal of slowing demand. That should add to the case that the Fed limit its rate increase at its next meeting on Feb. 1 to a quarter percentage point.

Still, there is a slight chance of another 50 basis-point hike if the highly anticipated Employment Cost Index data—which will be released on Jan. 31, a day before the Fed’s announcement—remains high.

Apart from autos and gasoline, sales of home furniture also led the decline, dropping by 2% on the month, followed by nonstore sales—mostly online—at 1.1%. Food service sales were down by 0.9%, similar to sales at health and personal care stores.

There were only two categories that posted sales increases: Building materials increased by 0.3%, and sporting goods and hobby sales rose by 0.1%.

Core producer inflation, which excludes food and energy, was up by 0.1%, following a downwardly revised 0.2% in the prior month. That brought the year-over-year core inflation rate down to 5.5% from 6.2% earlier.

Trade service prices, which account for margins received by retailers and wholesalers, increased by 0.3% on the month.