Inflation makes consumers miserable. Judging from retail sales, it might not matter, just yet. But high inflation expectations are a warning worth heeding, potentially signaling slower economic growth to come.
When the Commerce Department announced October sales at retail and food service stores, results far exceeded expectations, with total sales increasing at the fastest pace since March. On the heels of a surprisingly slow third-quarter gross domestic product report that showed the slowest pace of growth since the recovery began, strong retail sales have reminded investors that U.S. consumers are sourcing, still fuel economic activity.
You wouldn’t know it, however, by looking at the trust surveys. To take the last report from the University of Michigan. Consumer confidence fell to its lowest level in a decade in early November, said Richard Curtin, director of the survey.
The details are even more dismal: a quarter of American households expect their financial situation to deteriorate, the largest share since 2008; half of those polled say that the national economy has weakened recently and will continue to do so in the coming year; and nearly six in ten consumers believe that financial bad times will persist for the next five years. Goldman Sachs economists say recent declines in the Michigan gauge would lead to a 0.4% slowdown in annualized consumption growth in the fourth quarter, which accounts for about two-thirds of GDP.
What consumers say and do doesn’t always add up. Some economists avoid sentiment surveys, seeing them as unnecessary when spending data is readily available each month. After all, the rule of thumb in behavioral economics is to watch what people pay, not what they say, notes economist Dan Geller.
But it is not that simple. Since retail sales are reported in nominal terms, which means the data is not adjusted for inflation, the corresponding increase in the consumer price index needs to be considered. It’s a simple way to adjust revenue for inflation, says Citi economist Veronica Clark. Applying the CPI roughly suggests that higher prices accounted for about half of October’s sales increase, with actual sales volume accounting for the remainder.
Higher prices aren’t all bad. Companies are successfully passing on rising wages, rising material prices, and skyrocketing shipping costs, protecting profit margins and then paying them more back. Worried about supply chain challenges, retailers started running a flurry of holiday deals in October, according to a report from the software company
shows. But these agreements have been meager. Prices increased in 12 of 18 categories last month; they almost always fell, on average, over the same period from 2015 to 2019.
Expectations of record profit margins of 13.1% this year, 13.2% next year and 13.8% in 2023 are proof that cost pressures are not squeezing margins, said Ed Yardeni, president by Yardeni Research. Retailers’ stocks benefit. The
SPDR S&P Retail
the exchange-traded fund (ticker: XRT) is up 10% this month and 61% this year, far outpacing the 2% and 25% gains of the S&P 500 index, respectively. maybe not satisfied, but they pay.
At least for now. “I wouldn’t look at it and say, ‘All of our concerns are gone,'” Citi’s Clark notes of the Rising Retail Sales report. âThis is in part because prices drive up holiday shopping,â she adds.
While strong October sales bode well for fourth-quarter GDP, Clark warns of a possible return on investment in November and December, with sales in those months potentially weaker because consumers shied away. earlier purchases.
This is one of the reasons not to dismiss survey data which is so clearly in conflict with reality, or at least reality before it is corrected for inflation. Curtin of the University of Michigan attributes the drop in confidence almost entirely to rising prices. While respondents widely reported nominal income gains, half of all families predict a reduction in real income next year, and a quarter already say they feel inflation is reducing their standard of living, he says. .
Consumers speeding up their purchases in anticipation of higher prices is what the very dynamic central bankers fear. If real prices shape the inflation expectations that ultimately determine real inflation, the perception becomes reality. In fact, the report’s measure of inflation expectations over the next year edged up to 4.9%, the highest since 2008, with 71% of all consumers surveyed predicting higher prices in the market. coming year.
Importantly, long-term inflation expectations in Michigan’s latest survey held steady at 2.9%, but not alarmingly. One read: Consumers believe inflation is mostly transient, believing that the rates of price increases will slow down after next year. But not everyone is sold.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, notes that the share of people who expect inflation to be around the Federal Reserve’s 2% target over the next year has fell sharply and is close to the lowest level observed in recent decades. The number of people predicting inflation of 3% or more has increased dramatically, due to the share of people predicting inflation of 15% or more.
Few are seeing prices increase at this rate. âBut the mere fact that people see it that way should be enough to scare the Fed off,â Porcelli said, adding that the fear of inflation is rampant, with the entire distribution of income on the same page.
The question is not whether consumers feel inflation and expect it to increase over the next year. The question is whether consumers are spending now because of these rising inflation expectations at the expense of future spending, or in spite of them.
Write to Lisa Beilfuss at [email protected]