Retail: Consumers Pulling Back From Price Increases

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Retail sales rose a strong 1.0% in June, but mostly because of price increases. After adjusting for inflation, sales were down slightly. Consumers have reacted to higher prices for gasoline, food, clothing and general merchandise by cutting back on purchases. Department store sales in particular took a big hit, declining 2.6% even without an inflation adjustment. Inflation-adjusted motor vehicle sales held steady. E-commerce sales were a bright spot, rebounding strongly from a drop in May.

Restaurant sales were flat after adjusting for price increases for the second month. The return to more-normal patterns of dining out after the pandemic should continue to boost sales, though higher food and labor costs are forcing restaurants to raise their prices. This will likely be a drag on their sales at some point.

Some of the weakness in inflation-adjusted sales may be the result of consumers switching their buying patterns to more services. In any case, this weakness is likely to continue, whether from changes in buying patterns or consumer resistance to higher prices. With retail inventories at a high level, that raises the question whether there will be heavy discounting this coming holiday season.