American Consumer Retreats Amidst Inflation and High Interest Rates!
Retail sales in the U.S. barely rose by 0.1% in May, falling short of the 0.3% economists predicted. While this is an improvement over April’s revised 0.2% decline, it’s a clear sign that Americans are feeling the pinch of persistent inflation and soaring interest rates. The Commerce Department’s report reveals a concerning trend—adjusted for seasonal swings but not for inflation, the figures show a nation of shoppers tightening their belts.
Gas stations saw the biggest drop, with sales plunging 2.2% in May. Excluding gas, sales saw a modest 0.3% uptick. Shoppers also reined in spending at furniture stores (-1.1%) and outlets for building materials and garden equipment (-0.8%). The bright spot? Specialty stores selling sporting goods, books, and musical instruments experienced a 2.8% surge.
Despite some monthly increases, revisions for April and March show a downward trend. The specter of high inflation and the highest interest rates in nearly 25 years loom large. The aggressive rate hikes by the Federal Reserve in 2022 to combat inflation have left household savings from the pandemic nearly depleted.
ECONOMIC SLOWDOWN AND FED POLICY
The slowing retail figures could push the Federal Reserve to consider lowering interest rates, provided inflation also continues to ease. Joseph Brusuelas, chief economist at RSM US, emphasized the need to differentiate between a slower spending pace and an economic downturn. “This is a big relief for policymakers at the Fed,” he said, signaling a potential shift in monetary policy if current trends hold.
CONSUMER FATIGUE HITS ALL INCOME LEVELS
Retail giants like Walmart, Kohl’s, and Target report that American consumers are starting to cut back. High interest rates and inflation are squeezing not just lower-income Americans but middle-income earners as well. Kohl’s CEO Thomas Kingsbury highlighted the economic pressures facing their middle-income customers, while Walmart noted an influx of higher-income shoppers seeking bargains.
Even the affluent are feeling the strain, with luxury spending slowing down. However, spending on travel and in-person experiences like concerts remains strong, indicating a shift in consumer priorities.
WHAT LIES AHEAD FOR THE FED
The weaker-than-expected spending sets the stage for the Fed to potentially lower borrowing costs later this year. Inflation appears to be moderating, with the latest Consumer Price Index showing no change in May—the first instance since July 2022. Year-over-year, consumer prices rose by 3.3%, down from April’s 3.4%.
Philadelphia Fed President Patrick Harker welcomed the latest CPI figures, suggesting a cautious approach moving forward. The timing of the Fed’s rate cuts will depend heavily on continued moderation in inflation. The decision to cut rates is critical—acting too soon could reignite inflation, while waiting too long risks pushing the economy into recession.
As the evidence mounts, it’s clear: American shoppers are feeling the squeeze, and the economic landscape is shifting under their feet.
