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Resilient Consumers Spur US Retail Sales Growth

Inflation rose 0.5 percent in January, but U.S. consumers showed resiliency as retail sales rose 3 percent last month, representing the biggest increase in two years.

The uptick in the Consumer Price Index to 0.5 percent, seasonally adjusted, was ahead 0.1 percent from December, according to the U.S. Bureau of Labor Statistics on Tuesday. Apparel prices rose 0.8 percent in January.

Over the last 12 months, the Index rose 6.4 percent before seasonal adjustments. And while that was the smallest rise since the period ending October 2021, it represented only a small decrease from December’s 6.5 percent and was higher than the 6.2 percent estimated by analysts. Moreover, the 6.4 percent remains far higher than the 2 percent inflation target set by the Federal Reserve. The implication is that the U.S. Central Bank will need to raise interest rates for a longer period of time—possibly through the summer—than initially expected.

Consumers were able to shrug off the price increases, sending retail sales up in January to $697 billion after two straight months of declines. December’s 1.1 percent decrease was left unrevised in the January report from the U.S. Census Bureau. That figure also represented the third straight month of declines for general merchandise sales. Figures are seasonally adjusted, but are unadjusted for price changes. January’s figures also represented a 3.9 percent increase from year-ago levels.

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Among fashion retailers, department store sales posted the biggest gain, reporting a 17.5 percent rise to $11.98 billion. Sales at apparel and accessories stores rose 2.5 percent to $26.74 billion from $26.08 billion. Nonstore retailers, mostly e-commerce sites, posted a 1.3 percent gain to $109.78 billion from $108.34 billion. Furniture and home furnishing stores also saw an increase in sales at up 4.4 percent to $12.25 billion from $11.74 billion.

Helping to fuel consumer spending was the strong data on the jobs front last month. Private sector payroll firm ADP Inc. said 106,000 jobs were added in January, and equally important was the data point that annual pay rose 7.3 percent year-over-year. Moreover, ADP data indicated that people who changed jobs received a 15.4 percent average pay increase. The Bureau of Labor Statistics, which measures jobs gains differently from ADP, said earlier this month that nonfarm payrolls added 517,000 positions in January, far higher than either the 187,000 estimated or the 260,000 increase in December.

Looking ahead, Fitch Ratings’ senior director David Silverman said there will likely be some moderation to retail sales as consumers shift back to spending on services. “Over the next few weeks we’ll hear from public retailers on their 2023 plans, where we expect tighter inventory purchase plans and expense management to support operating margins despite top-line moderation,” he said.

“At a minimum, the stronger labor market means paychecks rather than rainy-day savings can fuel spending,” Wells Fargo economists Tim Quinlan and Shannon Seery noted in a research note on Tuesday.

Because consumers don’t seem to be overly concerned that inflation will persist, or that the labor market is deteriorating, “we see little cause for them to halt spending in the near term,” Quinlan and Seery concluded. They noted that a labor market slack could materialize amid tighter financial conditions, and that the outcome on consumer spending will depend largely on household incomes.