WASHINGTON (AP) – American consumers rebounded last month from a weak holiday shopping season by increasing their spending at stores and restaurants at the fastest pace in nearly two years, underscoring the economy’s resilience in the face of higher prices. high and multiple interest rate hikes by the Federal Reserve.
The government said on Wednesday that retail sales rose 3% in January after plummeting in the previous two months. It was the biggest one-month increase since March 2021, when a series of stimulus checks gave a major boost to spending. Excluding the pandemic era, January’s increase was the largest in more than two decades.
Driving the gain was a jump in auto sales, along with healthy spending at restaurants, electronics stores and furniture outlets. Some of the supply shortages that had slowed car production have eased, and more cars are gradually moving onto dealer lots. Expanded inventories have enabled dealers to meet a greater pent-up demand for the nation’s vehicles.
Robust retail sales data on Wednesday, coupled with a strong January jobs report, suggest the economy remains resilient, perhaps even strengthening, and with little risk of succumbing to a recession anytime soon. Earlier this week, economists at Goldman Sachs reduced the probability of a recession this year from 35% to just 25%.
Buoyant consumer spending, however, may also intensify upward pressure on inflation. The latest measure of consumer price inflation showed a slight year-on-year slowdown in January, but a sharp rise from December to January.
The combination of robust spending and hiring will also likely increase pressure on the Federal Reserve to raise its key interest rate further. The Fed has already signaled it plans to make two more quarter-point hikes, in a range of 5% to 5.25%, which would be the highest level in 15 years. Deutsche Bank said on Tuesday that it expects the Fed to add two more hikes this year, in the range of 5.5% to 5.75%.
Some of last month’s rise in retail sales likely reflected unusually warm weather, which could have encouraged more people to buy cars, go shopping and eat out. The government’s seasonal adjustment process also likely contributed to the increase in January’s figure. Its seasonal adjustments aim to change the sales data for typical calendar models. An example is a spike in spending during the holiday shopping season and then a decline in January.
“While the report suggests that consumers have regained their appeal, the noise from seasonal adjustment and warmer winter weather in January explain part of the force,” said Gregory Daco, chief economist at EY Parthenon. “The stronger-than-expected report puts consumption on a better footing into early 2023 and points to positive albeit slow consumer spending growth” in the current January-March quarter.
Retail sales data showed that spending at restaurants rose 7.2% in January and more than 25% from a year earlier. The retail sales report is not adjusted for inflation, so part of that increase reflects higher prices. According to the government’s inflation report, restaurant prices have increased by 8% in the last year.
Whether American shoppers can continue to spend quickly will help determine where the economy is going. The Fed’s eight interest rate hikes in the past year have raised the cost of mortgages and auto loans, as well as credit card interest rates. Inflation has also eroded workers’ paychecks, thereby limiting their ability to spend freely.
Some signs indicate that businesses expect a more cautious consumer. Coca-Cola, for example, said on Tuesday that its price hikes last year did not reduce demand for its beverages during the October-December quarter. But the company added that it expects slower sales growth this year and expects to raise prices at a much slower pace.
And PepsiCo said it wasn’t planning any further price hikes, according to a Reuters report, because it isn’t sure consumers will be able to afford them this year.
Despite all the challenges consumers face, they continue to show resilience. Several factors likely helped boost last month’s spending. Last month, some 70 million recipients of Social Security and other government pension programs received an 8.7 percent increase in their benefits, an annual cost-of-living adjustment to offset inflation. It was the largest such increase in 40 years.
The job market also increased in January, with nearly half a million new jobs being added. The unemployment rate hit 3.4%, its lowest level since 1969. With many companies still eager to hire and keep workers, average wages and salaries are up about 5% from a year ago, including the fastest rates of increase in decades.
Those increases have generally been eaten up by inflation. However, consumer price increases are slowing down. And for many households, a steep drop in gas prices since the summer has freed up more money to spend.
On Tuesday, the government reported that inflation eased again in January from a year earlier, the seventh consecutive drop, to 6.4% from 6.5% in December. But on a month-to-month basis, price increases increased in January compared to November and December, showing that high inflation won’t be defeated quickly or smoothly.
Lorie Logan, chairman of the Federal Reserve Bank of Dallas and a member of the Fed’s 19-person committee that sets interest rates, warned Tuesday that the central bank may need to make more rate hikes than it has thus far signaled.
“We must remain ready to continue rate hikes for longer than previously anticipated if such a path is needed to respond to changes in the economic outlook,” he said in prepared remarks.