Retail sales posted solid growth in June yet likely failed to offset sky-high inflation for the second straight month, government data showed on Friday.
Most of the increases came from higher gasoline prices in the first half of June, not stronger demand.
Most of the increases came from higher gasoline prices in the first half of June.
Retail sales rose by 1.0% in June before adjusting for inflation. Given the recent upside surprise from the consumer price index released on Wednesday, our estimate pointed to a 0.3% decline in sales after inflation was accounted for, marking the second month in a row of declines in sales volume.
The decline added to the overall downward trend of sales volume since March 2021, when inflation began to accelerate.
This highlighted why taming inflation should and will continue to be the Federal Reserve’s top priority for the rest of the year. We expect another much-needed 75 basis-point rate hike later this month before inflation becomes entrenched in core goods and service components.
There will be some significant relief to the headline all-item inflation readings in July as energy and food prices have come down since late June. Encouraging news from the record Amazon Prime day event should also help the online sales component in July.
But that does not mean retail sales will reach the same level we saw last year because of two pronounced parallel trends: spending continuing to shift from goods to services, and an overall spending slowdown as a result of aggressive rate hikes. Retail sales represent mostly spending on goods, not services.
Inside the report
June’s sales at gasoline stations rose by 3.6% on the month as prices continued to spike in June, registering a sharp 11.2% increase according to CPI data.
Spending at grocery stores and restaurants rose by 0.4% and 1.03%. Those increases put more pressure on consumers who have been forced to ration their spending between necessities like gasoline and food, and discretionary items like clothing and furniture, which make up the control group and feed into GDP calculation. The share of gasoline and food sales climbed to near 22% in June, from 19% in March 2021.
The control group increased by 0.8% in June on a dollar basis, implying a 0.1% increase after adjusting for inflation.
This foreshadowed a soft bounce in real personal spending month in June, adding some upside risk to our growth forecast for gross domestic product in the second quarter.
The lifeline in terms of consumer spending power might continue to come from service spending, which has remained steady in the first half of the year, and again is not captured fully by the retail sales report.
Another bright spot from the report came from the increase in automobile sales even after controlling for inflation. Sales at auto dealers rose by 0.8% on the month.
But the number of automobiles sold remained subdued compared to sales in early 2021 and even before the pandemic because of the persistent chip shortages and overall supply-chain disruption. Fast-rising interest rates also put a heavy dent on auto purchases, which are one of the most rate-sensitive categories.
Furniture and electronic sales were up by 1.0% on the month while non-store sales—which includes online stores and fuel dealers were up by 2.2%.
The takeaway
We expect retail sales to stay flatlined on an inflation-adjusted basis in the coming months as the economy slows and real personal income stays flat.
The upside risk to the outlook will continue to come from the $2 trillion estimated in excess savings that we believe remains mostly on the sideline. But before getting back to the long-term growing trend, the economy will continue on a rough and rocky path until inflation stays under control.
