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Is Inflation Behind Slowing Retail Sales Growth?

U.S. retail sales improved just 0.3 percent in February, illustrating inflation’s effect on consumer spending.

Economists were looking for 0.4 percent growth. Excluding sales at automobile dealers, sales rose just 0.2 percent, significantly lower than the consensus of 0.9 percent. The Department of Commerce said retail trade sales were “virtually unchanged” from January, but up 15.9 percent from a year ago.

Sales at apparel and accessories stores rose 1.0 percent to $26.5 billion in February from $26.2 billion in January, but were up 31.0 percent from the February 2021 level of $20.3 billion. Department store sales rose 2.0 percent to $12.2 billion from $12 billion in January, but were up 23 percent from $9.9 billion a year ago. Sales at nonstore retailers, such as e-tailers, fell 4.0 percent to $$95.8 billion from $99.5 billion in January, but was still up 14 percent from $84.2 billion a year ago. Sales at furniture stores fell 1 percent to $12.3 billion from $12.4 billion in January, but were up 7 percent from year-ago levels. All figures are on an adjusted basis to account for seasonal variations. Figures are adjusted to account for seasonal variations.

The nation’s annual inflation rate surged to 7.9 percent in February, the highest since January 1982. It could reach to 8.5 percent by the quarter’s end—reflecting the steepest jump in four decades. What’s more, the Federal Reserve is expected to raise inter-bank interest rates—the amount they charge each other for short-term loans—on Wednesday to tame red-hot inflation. This would make its first rate hike since 2018, with many bracing for additional upward revisions in the near future. While some thought the Fed might greenlight a 50-basis point hike, Bank of America Securities forecast increases of just half that amount at each of the seven remaining Fed meetings this year.

Although February’s retail sales report only showed a moderate gain, The National Retail Federation (NRF) on Tuesday said U.S. consumer spending could drive retail sales to 6 percent to 8 percent growth for 2022, or $4.86 trillion to $4.95 trillion.

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NRF’s forecast exclude those at automobile dealers, gasoline stations and restaurants. Online sales year-over-year, included in the total tally, are expected to improve between 11 percent and 13 percent to $1.17 trillion and $1.19 trillion.

While the forecast for 2022 remains above the 10-year, pre-pandemic growth rate of 3.7 percent, that figure pales in comparison with the 14 percent annual growth rate in 2021. Last year’s rate of growth was the highest in more than 20 years, the result of pent-up demand after early covid lockdowns.

That said, retail sales growth is expected to move at a “sustainable rate in 2022, but at a slower pace than experienced in the last two years,” NRF chief economist Jack Kleinhenz said at a press conference Tuesday.

Strong job and wage growth and declining unemployment are expected to support strong sales. Monthly payroll gains should average about 300,000, he said.

But Kleinhenz said NRF’s projection reflected “a lot of moving parts.” Inflation, geopolitical uncertainty and policy variability are just a few of the headwinds ahead.

Our view is that we expect solid economic growth to continue in the 3.5 percent vicinity that’s adjusted for inflation. Given the surge of inflation and tightening of monetary policy, and less fiscal stimulus, GDP growth will likely be slower this year,” Kleinhenz said, adding that as the “economy opens further in the coming months, there will continue to be dislocations due to persistent inflationary pressures.”

He added that NRF “expect[s] inflation to remain higher than previously expected,” and it likely won’t cool down until the Federal Reserve’s target of 2 percent is reached “sometime in 2023.”

Given the recent geopolitical disruptions, we will likely see some resetting of the world economy. And these ripples will make their way to the United States,” Kleinhenz said, adding that even after navigating three waves of Covid, the virus could “still complicate the outlook as well,” referring to the current surge in cases in China and Hong Kong.

Morgan Stanley chief U.S. economist Ellen Zentner said current projections for 4.3 percent GDP growth is lower than earlier forecasts, but does take into account higher energy prices, while Joel Prakken, chief U.S. economist at Markit, expects higher gasoline prices, slower economic growth, and other financial uncertainties stemming from Russia’s invasion of Ukraine.

It wouldn’t surprise me at all to see year-on-year consumer price inflation this year in the 6 to 7 percent range. So this is going to erode disposable incomes. It certainly is a damper on all those other positive fundamentals for consumers that we have noted,” Prakken said.

Walmart U.S. president and CEO John Furner described how the past few years have taught him that “flexibility is absolutely paramount to thriving as a business.” Customers are changing faster than ever, which means “we have to be ready for them any way” they need, he added.

Although Walmart still sees a financially healthy consumer, the retailer aims to create “great value for customers [so] we’ll be working over the next few quarters to do everything we can to keep costs down,” he said.

“While retail revenue forecasts remain strong, we must stay vigilant. There is still so much uncertainty and risk ahead. Despite somewhat solid fundamentals, consumers have so many things to contend with right now—war, inflation, fuel prices, the winding down of Covid benefits, to name just a few—which will put a strain on consumer confidence and, I suspect, future numbers,” David Bruno, director of retail market insights at Aptos, said in a statement after the NRF briefing. “As we look ahead, the spring holidays will likely mask some of these underlying concerns through March and much of April.”

Bruno said retailers can prepare for the uncertain months ahead by controling the customer experience. “Retailers who empower shoppers with convenience, flexibility, transparency and timely communications throughout every journey will earn the confidence of their customers and thereby encourage more purchases, more often,” he said.