On the surface, September’s 0.8% rise in retail sales suggests a healthy consumer. But most of that monthly gain came from purchases at gasoline stations, driven largely by higher prices rather than stronger demand.
Stripping out the volatile components like purchases at gas stations, the control group for retail sales, which is a better proxy for underlying demand, grew by only 0.1%, down sharply from 1.2% in August.
In a separate report, producer prices posted a big upside surprise, rising by 1.3% on the month against a consensus of 0.6%. Even excluding food, energy and trade, core producer prices still rose by 0.5%, a sign that cost pressures are spreading beyond the gas pump.
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Taken together, the two reports point to an uncomfortable mix: Prices are rising faster while underlying demand is losing steam. That is not a good sign for third-quarter growth, and it adds downside risk to our gross domestic product forecast.
On a three-month annualized basis, the control group rose by only 4.5% in nominal terms, well below the pace of prior months.
With inflation running above 3%, the real gain is much smaller, which means households are paying more but taking home fewer goods.
Producer prices also tend to lead consumer prices. Firms facing higher input costs will try to pass them on, which means more inflation pressure in the coming months.
For many businesses, especially in the middle market, that creates a difficult choice. Raising prices risks losing customers who are already pulling back, while absorbing the costs squeezes margins.
Either way, the pressure ends up on consumer spending, which makes up the largest share of GDP.
The retail sales data alone are unlikely to change the Federal Reserve’s rates decision in October. But the hot producer price report strengthens the case for tightening later in the year.
We still expect the Fed to hold its policy rate steady in October before hiking it in December, giving it more time to assess the paths of inflation and the labor market.
Looking ahead, we see more headwinds for retail sales and consumer spending as rising interest rates and inflation weigh on demand.
Consumers have drawn down their savings substantially in recent months to keep up with rising prices. With wage growth still subdued and more price increases likely, there will be less support for spending as the economy heads into the holiday season.
Inside the data
- Retail sales: Headline sales rose by 0.8% in September, beating the 0.3% consensus, and August was revised up to 1.3%. Gasoline station sales jumped by 6.4%, while sales excluding gas stations rose by only 0.2%. The control group rose by 0.1% after 1.2% in August, short of the 0.3% expected. Building materials, general merchandise and sporting goods all declined, while food services rose by 1.1%.
- Producer prices: Final demand prices rose by 1.3%, the biggest jump since March 2022, and were up by 6.3% from a year earlier. Goods prices rose by 2.6%, a record for the series. Energy jumped by 10.8%, and gasoline alone surged by 20.3%. Core prices excluding food, energy and trade increased by 0.5% on the month and by 5.0% from a year earlier. Further up the pipeline, unprocessed goods rose by 8.4%, led by a 28.3% jump in crude oil.
