U.S. retail sales jump 1% in June, but high inflation is a big reason why

The numbers: Sales at U.S. retailers rose a solid 1% in June — a sign that Americans are still buying lots of stuff. Yet a large part of the increase was tied to higher prices of gasoline and food and sales likely fell if inflation is taken into account.

Economists polled by The Wall Street Journal had forecast a 0.9% increase in retail sales.

Retail sales are a big part of consumer spending and offer clues about the strength of the U.S. economy. After surging during most of the pandemic, retail sales are starting to flag.

Americans bought more new cars in June, but they also paid more to fill up at the gas pump and put dinner on the table because of higher food and energy prices. They cut back on other discretionary items such as clothes to try to even their expenses out.

After adjusting for a 1.3% increase in inflation in June, real retail sales appear to have fallen slightly last month.

Big picture: Retailers are already witnessing the effects of high inflation as customers become more selective in what they buy. Some have even had to discount merchandise after finding themselves with excess inventory.

The pullback is not limited to retail.

The broader U.S. economy appears to have slowed as the Federal Reserve moves to raise interest rates sharply. Higher rates tend to slow growth by discouraging consumers and businesses from spending or investing as much.

The economy is still growing, however, even as inflation delivers lots of pain. The retail report appeared to give a boost to stocks in early Friday trading.

Key details: Auto and parts sales rose 0.8% last month after flatlining in May, government figures showed. Carmakers sold more vehicles at higher prices.

Sales at gas stations jumped 3.6% last month as the average cost of a gallon of gas topped $5 for the first time ever. That’s not the kind of spending that’s good for consumers or the economy.

However, gas prices have fallen sharply in July, which will offer consumers some relief.

If gas stations and auto dealers are set aside, retail sales increased 0.7% last month. That gives a better idea of retail-sales trends

Sales at other stores were mixed.

Internet retailers, big-box stores and home furnishing outlets reported higher receipts. Yet sales fell at home centers, clothing stores and department stores.

One category that economists watch closely is bars and restaurants, the only service-providing category in the retail report. Restaurant sales climbed a decent 1% last month.

Restaurant sales tend to rise when the economy is strong and Americans feel confident. Sales usually flatten out or decline in more troublesome times.

The originally reported 0.3% decline in sales in May was revised to show a 0.1% drop.

Looking ahead: “While consumers generally remain willing to spend, many are increasingly constrained and concerned by elevated inflation,” said chief economist Greg Daco of EY-Parthenon.

“American households are spending nearly as much money as they did earlier, but largely to keep up with higher prices, not to actually buy more stuff,” said senior economist Sal Guatieri of BMO Capital Markets. “That said, today’s report may cool talk of a near-term recession.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+1.72%
and S&P 500
SPX,
+1.53%
rebounded in Friday trades.

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