Despite Omicron and High Inflation
- Retail sales increased 3.8% in January, much better than expectations. Sales growth was strong across segments.
- Although inflation is high, most of the increase in sales came from higher volumes, not higher prices.
- Consumer spending growth will remain strong this year, but gradually slow. Spending growth will shift from goods to services.
Retail sales increased 3.8% in January from December, the biggest gain since March 2021, right when households had received a round of stimulus payments. This was more than double the consensus expectation for an increase of 1.7%. Sales fell 2.5% in December, revised lower from a 1.9% decline. The December drop was tied to earlier holiday shopping than usual because of concerns about product shortages; growth was strong in October and November.
Retail sales excluding autos rose 3.3% in January, and sales excluding autos and gasoline rose 3.8%. Control sales-retail sales excluding autos, gasoline, food service, and building materials, and which goes into nominal consumer spending in GDP-rose a very strong 4.8% in January.
Results were strong across segments in January. Sales at non-store retailers, primarily online, rose more than 14% over the month. Sales were up 7% for furniture and home furnishings, 6% for autos and parts, 4% for building materials, and almost 4% for general merchandise. Sales fell 1% for gasoline stations as gas prices fell over the month and were down 1% for restaurants and bars as consumers were more cautious about going out with omicron.
Consumers say they are worried about inflation, but they continue to spend. Even taking into account the December decline, retail sales in recent months have been increasing much faster than prices, so households are purchasing larger volumes of goods and services, not just paying higher prices.
Most of the drivers for consumer spending are positive. Households have about $2 trillion in extra saving compared to before the pandemic, thanks to government aid and limited opportunities to spend. Job growth is strong, wages are increasing, and household wealth is way up thanks to rapidly rising home values and, until recently, stock prices. Interest rates are still low, at least for now.
Consumer spending will continue to lead economic growth in 2022 thanks to these positive drivers. However, spending growth will shift from goods to services as the omicron variant fades and consumers feel more comfortable venturing out. However, consumer growth will slow over the course of this year, and in 2023 as households spend down some of their saving and high inflation, slower job growth, and rising interest rates become larger drags.
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