Retail sales rose 1.3% in October as consumers continue to spend despite inflation

Minneapolis
CNN Business
—

US shoppers spent more in October, showing continued resilience amid persistently high inflation and an early start to the holiday shopping season.

retail sales in the United States rose 1.3% in October, the Census Bureau reported Wednesday.

It is the biggest monthly increase since February and better than the 1% economists had expected. Consumption expenses was flat in September.

Retail sales, which are not adjusted for inflation, rose 8.3% for the 12 months ending in October, down slightly from September’s 8.6%.

Consumer spending increased on items such as gas, groceries, furniture and cars, but customers pulled back on spending at electronics and appliance stores, sporting goods stores and department stores, according to the report.

For large parts of the year, despite short-term increases in gas prices and several decades of high inflation, consumer spending has remained robust.

The retail trade report from October shows a suppressed desire to act that was caused by the pandemic remains strong, said Eugenio Aleman, chief economist for Raymond James.

“The fact that they were limited in their spending options before, for almost three years, has a big impact on consumers’ decisions to continue spending,” Aleman said.

But to finance this spending, which has begun to shift more toward experiences versus goods, consumers have leaned more heavily on debt. The New York Federal Reserve reported Tuesday that consumer credit card balances grew 15% year over year in the third quarter — the highest in more than 20 years.

But as the central bank increases the interest rate in its attempts to bring down stubbornly high inflation, which is taking a toll on consumers, said Gregory Daco, chief economist for EY Parthenon. Consumer sentiment has fallen in recent months.

“It is becoming increasingly clear that household budgets are being stretched by persistently high inflation, forcing many to dip into their savings and use credit to finance spending,” he wrote on Wednesday. “This is by no means sustainable, especially for families at the lower to median end of the income spectrum. Therefore, while overall surplus savings remain high around $1.5 trillion, we expect to soon see a noticeable decline in spending activity under the weight of inflation and high interest rates.”

Still, the strength of consumer spending, while good for the economy, could present challenges for the Fed.

“Even after adjusting for inflation, consumers are spending more,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a note. “It is tempting to cheer the ‘resilience’ of the consumer, but the persistence of spending gives companies no incentive to forgo price increases, thus making the task of controlling inflation more difficult for policymakers.”

The October retail sales report comes amid a flurry of consumer-related economic data and retailer earnings reports ahead of the holiday shopping season.

Two important inflation gauges, the consumer price index and the producer price index, both showed that price increases have cooled.

“The inflation relief consumers got in October that we saw in last week’s CPI report extended into this morning’s retail sales numbers,” said Scott Brave, head of economic analysis at Morning Consult.

While inflation appears to have peaked, consumer behavior has changed, Claire Tassin, Morning Consult’s retail and e-commerce analyst, said in an interview Wednesday.

“Everyone is more price sensitive lately,” she told Christine Romans, CNN Business’ chief correspondent. “People are certainly changing the stores they shop at, so I can certainly see wealthier shoppers shopping at Walmart frequently, especially … to access some of the lower prices than maybe at other stores they would traditionally shop at.”

On Tuesday, Walmart reported that sales in the United States had increased 8.2% last quarter from a year earlier. The discount retailer noted that it achieved “strong share gains”, including from high-income households.

Earlier on Wednesday, however, Target said profits plunged 52% last quarter and revenue rose just 3.4% as consumers began to feel the heat from inflation. The retailer warned of a slow holiday season ahead as shoppers hold out for bargains.