Retail Sales Remain Fairly Resilient in Face of Hotter-Than-Expected June CPI

Key Takeaways:

• Retail sales and food services increased 1.0 percent in June and May’s retail sales were revised modestly upward, from a 0.3 percent decline to a 0.1 percent decline, according to the Census Bureau. Part of the increase was due to higher prices, as sales at gas stations rose 3.6 percent. Still, nonstore retail sales (mostly online sales) rose 2.2 percent, and restaurant and bar sales were up 1.0 percent. Core retail sales (excluding food services, autos, building supplies, and gas stations) rose 0.8 percent, their largest monthly gain since January, though May’s figures were revised downward from flat to a 0.3 percent decline.
• The Consumer Price Index (CPI) increased 1.3 percent in June, an acceleration of three-tenths from May, according to the Bureau of Labor Statistics (BLS). On an annual basis, prices were up 9.1 percent, five-tenths above last month’s recent peak and the fastest rate since 1981. The report was broad-based, but outsized contributors continued to include gasoline, which surged 11.2 percent over the month, and food, which rose 1.0 percent. Rent of primary residences increased 0.8 percent, the largest one-month gain since 1986, and was up 5.8 percent on an annual basis. Similarly, owners’ equivalent rent jumped 0.7 percent on the month and was up 5.5 percent over the year. Car prices, which had shown signs of slowing earlier in the year, appear to have picked up again with new car prices rising 0.7 percent and used car prices up 1.6 percent over the month. Excluding food and energy, core CPI rose 0.7 percent on the month and 5.9 percent on an annual basis, a deceleration of one-tenth from May.
• The Producer Price Index (PPI) for final demand of goods and services rose 1.1 percent in June and was up 11.3 percent on an annual basis, according to the BLS. Final demand for energy jumped 10.0 percent. Final demand for services increased 0.4 percent. Core PPI (less food, energy, and trade services) rose 0.3 percent over the month and 6.4 percent over the year, the slowest rate of annual increase since October 2021.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sector, declined 0.2 percent in June, its first decline since December 2021, according to the Federal Reserve Board. Utility output, which is highly influenced by weather, dropped 1.3 percent, while manufacturing output declined 0.5 percent. Mining output rose 1.7 percent. In addition, as part of its annual revision process, industrial production was revised to a lower level, primarily affecting the previously reported April gain, which is now 0.8 percent instead of 1.4 percent.
• The National Federation of Independent Business Small Business Optimism Index fell 3.6 points to 89.5 in June, its lowest level since January 2013. On net, negative 61 percent of firms expect the economy to improve, a decline of 7 percentage points, and negative 28 percent of firms expect real sales to be higher in the next six months, a whopping 13 percentage point drop (though only 4 percent of firms rated poor sales as their most important problem). A net 19 percent of firms expect to increase employment, down 7 points. A record 34 percent of firms rate inflation as their most important problem, a 6-percentage point jump.
• Consumer (non-mortgage) credit outstanding increased by $22.3 billion in May, $14 billion lower than the April increase, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $7.4 billion, and nonrevolving credit (largely auto and student loans) rose by $14.9 billion.

Forecast Impact:

The CPI report came in above our expectations and continues to point to broad-based inflationary pressures. Still, we believe gasoline prices will likely drag on July’s report, based on the pullback in recent weeks, and price increases in categories such as apparel, household furnishings, and appliances are inconsistent with reports of retailers marking down excess inventories amid slowing consumer demand, so these trends may reverse soon as well. Core PPI is also decelerating on an annual basis, supportive of our forecast for generally slowing price increases in the second half of 2022. However, the significant uptick in shelter costs, which generally lag actual rent and home price growth, is concerning given these measures are likely to be persistent through at least the end of the year. However, there is a caveat that private rent metrics have shown a substantial slowdown in rent increases over recent months. Therefore, although CPI is likely to remain elevated due to the lagged nature of how the BLS calculates shelter costs, the month-over-month increases may overstate the current stress to consumer finances (though the flipside is that rising shelter costs were understated by the CPI earlier in the year).

This effect may help to explain the stronger-than-expected retail sales figures. Even with the usual caveat of real retail sales being weaker than the nominal figures, core retail sales still point to a modestly stronger consumer than recent personal consumption data suggested. Additionally, although credit debt outstanding continued to increase in May, the pace of increase slowed, further suggesting that consumer finances may not be as dire as the CPI figures suggest, and the recent pullback in energy prices may help to spur consumption elsewhere in Q3. Finally, despite a decline in June and a downward revision to April, industrial production was still up 6.1 percent at an annual rate for Q2. Given the balance of incoming data this week, we continue to expect the Fed to hike aggressively at its July 26-27 meeting, with recent comments from Fed officials supporting another 75-basis point hike.

Nathaniel Drake
Economic and Strategic Research Group
July 15, 2022

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