Americans spent more money at retailers last month, providing a slight boost to the economy just as the Federal Reserve considers how much to cut its key interest rates.
Retail sales rose 0.1% from July to August, after jumping the most in a year and a half last month, the Commerce Department said on Tuesday. Online stores, sporting goods stores, and home and garden stores all reported higher sales.
The data shows that consumers are still able and willing to spend more despite the cumulative impact of three years of hyperinflation and high interest rates aimed at combating those rising prices. Average wages, especially for low-income Americans, have also risen sharply since the pandemic, which has allowed many Americans to continue spending as many necessities become more expensive. And price increases are slowing, as inflation fell to a three-year low last month at 2.5%.
The impact of inflation and consumer health has been an ongoing issue in the presidential campaign, with former president Donald Trump blaming the Biden-Harris administration for price hikes after the pandemic. Vice President Kamala Harris has also charged that Trump’s claim that he will pay a tax of 10% to 20% on all sales will amount to a “Trump tax” that will increase prices.
The decline in employment and the recent rise in the unemployment rate have fueled economic concerns, but prudent spending should boost growth. The Atlanta branch of the Federal Reserve estimated that the economy grew at a robust annual rate of 2.5% in the third quarter.
“With consumption still very healthy, for the time being, fears of a recession seem overblown,” said Olivia Cross, North America economist at Capital Economics.
The Fed can provide additional stimulus to consumers and the economy by lowering borrowing costs. It may lower its key rate at its meetings in November and December as well as on Wednesday. Such reductions should, over time, reduce the rates of mortgages, car loans, and credit cards. Average mortgage rates have already fallen in anticipation of the Fed’s actions.
Consumers have been showing signs of stress, with credit card debt rising and savings rates falling, trends that could weigh on spending in the coming months.
Kamie Meeks, a 22-year-old college student in New York City, said inflation has made her better at finding bargains. He buys his food from Aldi grocery store. You shop mostly online at Walmart and at Chinese retailers like Shein and Temu.
It’s easy to “find deals” online, Meeks said.
In August, sales jumped 1.4% at online retailers and rose 0.7% at health and personal stores. However, restaurants and bars were down, which is a sign that consumers are holding back on their discretionary spending.
The gas station reported that sales fell 1.2%, reflecting lower prices last month. Auto sales are also down.
On Wednesday, Fed policymakers will decide whether to cut their key interest rate by a quarter-point or half-point more than usual, from its current level of about 5.3%, a 23-year high.
Wall Street is widely expecting a one-point drop. With inflation back to the Fed’s 2% target, many economists also argue that the central bank doesn’t need to keep rates that high. At the same time, some Fed policymakers who worry that inflation may remain stuck at its current 2.5% level may be reluctant to cut rates immediately. They can point to strong retail sales as evidence that there is no need to accelerate price cuts.
One reason inflation has slowed from a four-year high of 9.1% in June 2022 has been consumers’ reluctance to pay some of the higher prices they’ve experienced at grocery stores, restaurants, and clothing stores. Instead, shoppers trade up to stock brands, look for deals, or spend more at discount retailers. Some packaged food makers, fast-food restaurants, and retailers like Target have responded by lowering prices or offering deals to attract shoppers.
Big retailers say shoppers will remain wary given the busy holiday season, so they’ll be pushing discounts.
“Overall, customers remain focused on sales and are attracted to the highly predictable sales periods of the 4th of July, Black Friday in July, and the start of back-to-school sales events,” Best Buy CEO Corie Barry said recently.
-Christopher Rugaber and Anne D’Innocenzio, Associated Press business writers
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