U.S. retail sales rise in April despite inflation

Consumer and business spending still increasing at healthy pace amid economic contraction

U.S. retail sales rose 0.9 per cent in April, a solid increase that underscores Americans’ ability to keep ramping up spending even as inflation persists at nearly a 40-year high.

The increase was driven by greater sales of cars, electronics and at restaurants, the Commerce Department said Tuesday.

Even adjusting for inflation, which was 0.3 per cent on a monthly basis in April, sales increased. Gas prices fell slightly last month, restraining inflation, after soaring in March in the aftermath of Russia’s invasion of Ukraine.

Consumers are providing critical support to the economy even after a year of seeing prices spiral higher for gas, food, rent and other necessities. The economy contracted in the first three months of the year, but consumer and business spending still increased at a healthy pace.

“Never bet against the U.S. consumer has always been a good adage,” said Paul Ashworth, chief U.S. economist at Capital Economics, a consulting firm, in a note to clients. “Despite the surge in prices weighing on their purchasing power, the U.S. consumer now appears to be single-handedly keeping the global economy afloat.”

The Tuesday report also showed that sales in March were revised much higher, to a gain of 1.4 per cent, from 0.7 per cent. As a result, spending even rose that month after adjusting for inflation, which surged to 1.2 per cent as gas prices rose. The revision suggests the economy likely shrank by less than the 1.4-percent contraction that was reported last month.

The strength of the consumer makes a recession much less likely, at least any time soon, Mr. Ashworth said. But it also keeps the pressure on the Federal Reserve to tighten borrowing costs in order to cool the economy.

Strong hiring, rapid wage increases and a healthy level of savings – on average – have bolstered consumers’ financial health, despite a sharp increase in consumer prices of 8.3 per cent in April compared with a year ago. The increase was just below a four-decade high reached in March.

Still, economists are watching closely to see if consumer spending can continue to outpace inflation. Slower spending would drag down the economy’s growth. While that might bring down inflation, it would also threaten to push the economy into recession.

Inflation is still disrupting many retailers’ businesses, even if sales increase. On Tuesday, Walmart reported an unexpected drop in profit in the first quarter, even as it sales rose. Company executives said rising costs for fuel, food and labour boosted its expenses.

And for lower-income Americans, inflation is taking a harder toll and forcing many people to adjust their spending patterns. Walmart executives told analysts on a conference call on Tuesday that some customers were switching to cheaper store brands from national brands, particularly in lunch meats, as they juggled higher costs.

More customers are buying half-gallon jugs of milk, instead of a full gallon, company executives said. Milk prices have leapt 15 per cent in the past year, according to government data.

Separately, Home Depot reported higher sales in its first quarter and raised its profit forecast for this year. Yet much of that increase simply reflected inflation – customer transactions fell 3.9 per cent.

Home Depot’s sales jumped in the pandemic as more people, cooped up at home, undertook home renovation projects, so some pullback was expected as pandemic restrictions fade.

Still, the robust sales figures in the government’s report are also impressive since retail sales covers only about one-third of consumer spending, with the rest going to services such as travel, haircuts, and health care. Airlines and hotels are also reporting strong sales as more people are taking trips after postponing travel for two years.

The retail sales figures suggest that some supply chain snarls may be easing. Sales at auto dealers rose 2.2 per cent, and they increased 1 per cent at electronics stores and 0.7 per cent at furniture stores.

The continuing strength of consumer demand, fuelled by a robust labour market, is a key reason the Federal Reserve has accelerated its efforts to tighten credit and cool the economy. By doing so, Fed Chair Jerome Powell hopes to bring down inflation without causing a recession.