Retail sales in U.S. shackled by inflation and high interest rates

Retail sales in U.S. shackled by inflation and high interest rates

The numbers: Sales at U.S. retailers barely rose in May, suggesting Americans are feeling the weight of lingering inflation and high interest rates.

Sales edged up 0.1% last month. They had been forecast to rise 0.2%, based on a Wall Street Journal poll of economists.

Sales in April were also revised to show a decline, instead of no change as originally reported.

Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales are still rising at a pace consistent with stable growth, but they may have slowed enough to help the Federal Reserve in its fight against in inflation.

If inflation decelerates further, the central bank could cut interest rates as early as the fall, giving a boost to consumers and businesses.

Key details: Sales of new vehicles and car parts, an up-and-down category, increased 0.8% last month and padded the headline retail number.

Gas receipts, on the other hand, fell 0.8% because of lower oil prices, but that’s a good thing for consumers.

Retail sales rose 0.1% in May if car dealers and gas stations are excluded. Car and gasoline purchases exaggerate overall retail spending.

Perhaps the biggest negative in the May retail report was a 0.4% decline in spending at restaurants. Restaurant spending has fallen in four of the past six months for the first time since the pandemic.

Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales decline during times of economic distress.

Sales also fell at home centers, grocery stores and stores that sell furniture — a residue of rising housing prices and high mortgage rates.

Yet sales rose at internet retailers, clothing outlets and big-box electronics stores, suggesting Americans still have some money left over to pay for so-called discretionary goods, or things people want, rather than need, to buy.

Big picture: Households are feeling more financial strain, but unemployment is low and the economy is still in good shape overall.

Still, slower economic growth is welcome news to the Fed.

Looking ahead: “The pace of consumer spending has slowed this year after a very strong second half of 2023. That is good news for the Fed and some more evidence that demand in the economy is cooling,” economist Ali Jaffery of CIBC Economics wrote in a note to clients. “We expect the first Fed cut in September.”

Market reaction: The Dow Jones Industrial Average and S&P 500 were set to open little changed in Tuesday trading. Major stock markets are at or near record highs.