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Are higher prices thwarting consumer demand?

The news: US retail sales fell month-over-month (MoM) in May for the first time in five months thanks in large part to a rapid decline in purchases of vehicles and other big-ticket items, per the US Commerce Department.

  • The 0.3% MoM decline was below the Dow Jones-estimated 0.1% gain, according to CNBC.
  • Excluding auto sales and purchases at gas stations, retail sales inched up 0.1% MoM, the smallest gain in five months.
  • On a year-over-year (YoY) basis, retail sales rose 8.1%. However, the Commerce Department’s numbers are not inflation-adjusted, which means consumers are getting less for their money due to rising prices.

Digging into the numbers: Consumer spending has significantly shifted away from big-ticket items from January to May of this year.

  • Electronics and appliance store sales fell 1.8% in those five months, while furniture and home furnishings sales rose just 2.5%.
  • Rising gas prices are partially to blame as sales at gas stations soared 38.7%.
  • Restaurant sales, which is the only services component in the report, rose 23.6%.

What’s happening? The Commerce data and broader trend lines suggest that US consumers’ appetite for goods is softening as some feel the pinch of rising prices and interest rates, while others shift their spending to services such as eating out, travel, and entertainment.

  • Another factor driving the slowdown is that consumers are starting to lose their footing as they dip into their pandemic-padded savings and increasingly use credit cards.
  • Retailers such as Target and Best Buy have cited consumers’ shifting behaviors in recent earnings commentary. Target said the abrupt shift in spending left it with excess inventory in bulky categories like kitchen appliances, TVs, and outdoor furniture, and Best Buy noted slow home theater and computing sales hurt its year-over-year comps.

Across the globe: A challenging retail picture isn’t unique to the US.

  • Retail sales in China fell 6.7% MoM in May, per China’s National Bureau of Statistics.
  • That said, China’s May numbers were a marked improvement from an 11.1% MoM decline in April, when millions of residents were confined to their homes due to COVID-19 lockdowns.

Looking ahead: US retail sales (excluding auto) are expected to jump 7.5% YoY during the critical mid-July to Labor Day back-to-school period, per a forecast by Mastercard SpendingPulse.

  • But that forecast doesn’t account for inflation, which means the outlook isn’t as optimistic as it seems at first glance.
  • Mastercard expects shoppers returning to stores to be a key driver behind that growth, as its forecast calls for in-store sales to rise 8.2% YoY.
  • Another important projection is the return of in-person events pushing up apparel sales 8.7% YoY.

The big takeaway: While US consumers have been incredibly resilient throughout the pandemic, they’re starting to feel the impact of prolonged inflation as food and gas prices eat up more of their income.

  • The challenging environment is going to force retailers selling discretionary items to find creative ways to drive sales.

Go further: For more on The Era of Uncertainty, read our report here.