Higher Gas Prices Bite

Retail sales rose a tepid 0.3% in February after surging an upwardly revised 4.9% in January. Vehicle sales rose 0.8% after a 6.9% surge last month. Retail sales excluding vehicle sales rose 0.2%. Spending at the gas pump surged 5.3% during the month, driven by higher prices. Spending on building materials also held up. The rest of spending was more mixed.

Core retail sales, which feed more directly into GDP calculations, rose only 0.2% in February. The regressive nature of higher prices at the pump showed up in the composition of that spending. Those who could, bought clothing and stepped out at restaurants and bars, while spending at grocery stores and big-box discounters took it on the chin.

Spending online actually contracted as those who could returned in person to department and specialty retailers. Furniture and appliance sales fell after posting robust gains in January. Backlogs are long and likely to get longer now that parts of China have reentered hard lockdowns to control the spread of Omicron.

The only silver lining was year-over-year gains in retail sales, which were up a staggering 17.6% in February. The gain after adjusting for inflation is closer to 8%, which is still decent. The pandemic has skewed spending toward goods instead of services, which remain suppressed. Look for some better news on the spending front when more of the service sector is counted in the personal consumption expenditures data out later this month for February.

Bottom Line
Retail sales disappointed after a nice bounce back in January. The two months together are not as bad but reveal cracks in the foundation of growth. Lower income households are feeling a disportionate bite from inflation; the places they spend are suffering.

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