U.S. retail sales rose 0.5% in March amid soaring inflation

U.S. retail sales rose modestly in March, but higher prices for food, gasoline and other basics took a big share of consumers’ wallets.

Retail sales increased 0.5% after registering a revised 0.8% increase from January to February.

Spending has been fuelled by wage gains, solid hiring and more money in banking accounts. January’s increase of 4.9% was the biggest jump in spending since March 2021, when American households received a final federal stimulus check of $1,400.

In research note, Sal Guatieri, senior economist and director with BMO Capital Markets, said that, while “retail sales mostly matched expectations” in March, “raging consumer prices suggest retail volumes actually contracted in the month, and possibly in the past year.”

However, he also noted that, despite inflation raising the cost of household staples, “discretionary spending still seems to be thriving […]. Furniture/electronics/appliances, clothing, and sporting goods/hobbies/music all posted big gains in March.”

The retail report covers only about a third of overall consumer spending and doesn’t include services such as haircuts, hotel stays and plane tickets, areas that have been rebounding.

BMO noted that today’s data “is consistent with our estimate of 3.0% annualized real consumer spending growth in Q1 and 1.5% GDP growth, though it points to slower spending in Q2.”

Retailers are closely monitoring Russia’s war with Ukraine and how it could weigh on shoppers’ confidence but also worsen inflation. The conflict has already limited supplies of wheat, vegetable oils, and electronic components like chips. It’s pushed up fertilizer prices that were already high, made scarce supplies even harder to find and squeezed farmers, especially those in the developing world. In addition to the Russian invasion, rising Covid-19 cases and renewed restrictions in China could worsen supply chain issues.

The Labor Department said Tuesday that its consumer price index jumped 8.5% in March from 12 months earlier, the sharpest year-over-year increase since 1981. Prices have been pushed up by bottlenecked supply chains, robust consumer demand and disruptions to global food and energy markets worsened by the war. From February to March, inflation rose 1.2%, the biggest month-to-month jump since 2005. Gasoline prices drove more than half that increase.

The March inflation numbers were the first to fully capture the surge in gasoline prices that followed Russia’s invasion of Ukraine on Feb. 24. Moscow’s attacks have triggered far-reaching Western sanctions against the Russian economy.

The acceleration of inflation is happening in an otherwise strong economy. In March, employers adding a robust 431,000 jobs — the 11th straight month in which they’ve added at least 400,000. For 2021, they added 6.7 million jobs, the most in any year on record. In addition, job openings are near record highs, layoffs are at their lowest point since 1968 and the unemployment rate is just above a half-century low.

Retailers have been forced to keep raising wages to stay competitive, but now they worry any progress that they made is being undone because higher prices are eating into workers’ earning power.

To protect themselves against any consumer spending downturn, retailers are cutting back on expenses, while taking a measured approach to ordering merchandise.

“The main message to the Fed is that rising prices are starting to sap spending power, but strong job growth and excess savings are providing a backbone, which will require much higher interest rates to break,” Guatieri said.

“With inflation at a four-decade high, the Fed has virtually no flexibility to guide policy rates back to neutral (at a minimum). After only recently taking its foot off the accelerator, it can’t afford to gently tap the brakes now. Look for a 50-bps hike in May,” he added.