The surprising reason Americans loosened their purse strings in June

The prices of consumer goods declined last month, allowing inflation-weary Americans to loosen their purse strings again.

According to the Department of Commerce, retail sales excluding motor vehicles rose by 0.4% in June after an upwardly revised gain of 0.1% the prior month. Excluding automobiles and gas, sales jumped 0.8%, much higher than the 0.2% that was expected and the largest increase since the start of 2023.

Meanwhile, a category of retail purchases called control-group sales, which are used to calculate GDP, rose by 0.9%, matching the largest increase since April 2023.

Total retail purchases were unchanged compared to May, largely due to a drop in auto sales. However, economists said the underlying trend pointed to a rebound in consumer spending that was largely driven by a 0.4% decline in goods prices, which matched the previous month’s decline.

“Consumers took advantage of lower goods prices in June, spending on categories where they recently had exhibited caution,” said Bloomberg economist Estelle Ou.

Despite the rosy results, Ou cautioned that “consumers continued to pull back on discretionary service spending,” especially at restaurants and drinking establishments.

Discretionary spending is a broad category that includes non-essential expenses, such as travel, entertainment, and recreation. Economists use it to measure the health of the average consumer, whose spending accounts for more than two-thirds of U.S. GDP.

The results suggest that consumers are getting some reprieve from moderating inflation, but remain cautious about their budgets.

Slowing inflation and still pinching pennies

According to Reuters, June marked the first time in four years that the Consumer Price Index (CPI) registered a monthly decline. CPI fell 0.1% from May but was up 3% year over year. As Creditnews reported at the time, it was the smallest annual increase in more than three years.

Americans have seen the price of goods rise by nearly 21% since the start of Covid, with some categories like auto insurance and services rising at faster rates.

Economists say consumer spending hasn’t fallen off a cliff yet because Americans are finding clever ways to buy what they need without breaking the bank. Consumers are cutting back on certain grocery expenses and substituting higher-priced items with cheaper alternatives.

“We’re beginning to see the consumer no longer willing to take the higher pricing,” said Samuel Rines, an investment strategist at Corbu. “So companies were beginning to get a little bit more skeptical of their ability to just have price be the driver of their revenues.”

Companies like Kraft Heinz, Unilever, and PepsiCo have also reported that consumers are trading down to cheaper brands to save money.

Ramon Laguarta, CEO of PepsiCo, told investors in a recent earnings call that “we need some new entry price points and probably some new promotional mechanics” to attract customers.

So far, in 2024, the company sees “normalization of the cost, normalization of inflation,” Laguarta said. “We see everything trending back to our long-term” pricing trend now that the pandemic is fully in the rearview mirror, he explained.