U.S. retail sales fall for first time in five months. Is high inflation starting to bite?

The numbers: Sales at U.S. retailers fell 0.3% in May — the first decline since the end of 2021 — largely because of fewer auto purchases. Yet rising prices due to high inflation may have also discouraged shoppers.

Economists polled by The Wall Street Journal had forecast a scant 0.1% increase.

Retail sales are a big part of consumer spending and offer clues on the strength of the U.S. economy.

After adjusting for a 1% increase in inflation in May, real retail sales fell by more than 1% last month.

Big picture: After surging in 2021, retail sales are likely to continue to soften.

For one thing, Americans are shifting their spending toward services such as travel and entertainment. Earlier in the pandemic, when they went out less, they bought more consumer goods such as cell phones, computers and home furnishings.

The economy is also likely to slow in response to higher interest rates. The Federal Reserve plans to raise rates sharply over the next year to try to stamp out the worst bout of inflation in 40 years.

If households cut back too much, however, it could be a blow to the economy. Consumer spending accounts for about 70% of U.S. economic activity.

Key details: Auto and parts sales fell 4% last month and were a big drag on the headline retail number, government figures showed.

Although car prices are higher and borrowing rates have gone up, automakers don’t have enough cars to sell because of ongoing supply shortages. There’s still plenty of demand.

Sales at gas stations jumped 4% last month mostly because higher oil prices. That’s not the kind of spending that’s good for consumers or the economy, however.

If gas stations and auto dealers are set aside, retail sales edged up 0.1% last month. That gives a better idea of retail-sales trends

Sales at other retailers were mixed.

U.S. retail sales in May -0.3%
Autos & parts -3.5%
Home furnishings -0.9%
Electronics & appliances -1.3%
Home & garden centers +0.2%
Food & drinks +1.2%
Health & personal care -0.2%
Gasoline stations +4%
Clothing +0.1%
Sporting goods, books & hobbies +0.4%
General stores +0.1%
Miscellaneous stores -1.1%
Internet retailers -1.0%
Bars & restaurants +0.7%

One category that economists watch closely is bars and restaurants, the only service-providing category in the retail report. Restaurant sales climbed a decent 0.7% last month.

Restaurant sales tend to rise when the economy is strong and Americans feel confident. Sales usually flatten out or decline in more troublesome times.

The originally reported 0.9% increase in sales in April was revised down to a 0.7% gain.

Looking ahead: “While it’s only one month, this is a sign that higher prices are starting to thwart consumer demand,” said economist Katherine Judge of CIBC Economics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+1.10%

and S&P 500
SPX,
+1.30%

were set to open higher in Wednesday trades.

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