Consumers say inflation is unbearable, but data shows otherwise
Despite persistently high inflation, Americans' spending continues to grow.
Last month, U.S. consumers mustered a 0.7% increase in retail sales, according to the Commerce Department. This figure exceeded the expectations of economists and came pretty close to August's revised 0.8% growth.
It's worth noting that August's sales were influenced by a spike in gasoline prices, which was not the case in September when gas prices rose at a slower pace.
A particularly closely watched category of retail sales—excluding auto dealers, gas stations, and building materials—increased by 0.6% compared to the previous month.
The report marks the sixth consecutive monthly gain, signaling that higher prices aren't turning off consumers as much as economists expected.
Consumer spending beats inflation
Part of nominal sales growth, of course, comes from consumers just keeping up with rising prices, but only part of it.
The recently released consumer price index (CPI) for September reported a 0.4% increase—lower than the sales growth. On an annual basis, retail sales saw a 3.8% increase, surpassing the 3.7% rise in the CPI.
“The U.S. consumer cannot stop spending,” said David Russell, global head of market strategy at TradeStation.
“All three retail sales reports for Q3 were above estimates, which puts us on track for a strong GDP number later this month. It also gives the Fed zero reason to loosen policy, which keeps the 10-year Treasury yield pushing toward 5%.”
The strong sales in September also suggest that the economy may not slow down as much as previously expected in the final quarter of the year.
Will more rate hikes follow?
Economists think strong retail sales indicate that the economy may still be running too hot for the Fed's taste.
“If the cost-of-living crisis has hit consumer confidence, you wouldn’t know it judging by a second month of strong retail sales with the consumer buying everything that wasn’t nailed down,” said Christopher S. Rupkey, chief economist at FWDBONDS LLC, a financial markets research company.
That could convince the Fed the job is not done and that one or two extra rate hikes are called for.
“Fed officials have another rate hike this year up on their forecast board, and they will need to use it, if the economic data continues to surprise economists on the upside.”
Year-end economic headwinds
There are concerns, however, that spending may decelerate as the year comes to a close.
The headwinds vary from union strikes and student loan payments to a potential government shutdown and Israel-Hamas war escalation.
"Growth will likely be slower in the fourth quarter, with headwinds from the restart of student loan payments, the UAW (United Auto Workers) and actors’ strikes, and tail risks from the Israel-Hamas war and a possible government shutdown," said Bill Adams, chief economist at Comerica Bank.
In fact, the International Monetary Fund also warned that if the conflict escalates into a broader Mideast war, it could lead to another surge of inflation, hindering global economic growth.