Retail sales surged by 1.3% in October as consumers continued to spend despite inflation

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American shoppers spent more in October, showing continued resilience amid persistently high inflation and an early start to the holiday shopping season.

US retail sales rose 1.3% in October, the Census Bureau reported Wednesday.

That’s the biggest monthly gain since February and better than the 1% economists expected. Consumer spending it was flat in September.

Retail sales, which are not adjusted for inflation, rose 8.3% for the 12 months ended in October, down slightly from September’s 8.6%.

Consumer spending increased on items such as gas, groceries, furniture and cars, but shoppers pulled back spending at electronics and appliance stores, sporting goods retailers and department stores, according to the report.

For many years, despite short-term spikes in gas prices and decades of high inflation, consumer spending has remained robust.

October retail sales report shows the pent-up desire to shop it caused by the pandemic remains strong, said Eugenio Aleman, chief economist for Raymond James.

“The fact that they reached their consumption alternatives earlier, almost three years, has a big impact on the consumer’s decision to continue spending,” said Aleman.

But to finance that spending, which has begun to lean more toward experiences versus goods, consumers must more heavily on debt. The New York Federal Reserve reported Tuesday that consumer credit card balances increased by 15% year over year in the third quarter – the highest in more than 20 years.

But as the central bank raises interest rates in its efforts to lower Stubbornly high inflation, it takes a toll on consumers, said Gregory Daco, chief economist for EY Parthenon. Consumer sentiment has fallen in recent months.

“It is increasingly clear that household budgets are being stretched by persistently rising inflation, forcing many to dip into savings and use credit to finance expenditures,” he wrote Wednesday. “This is by no means sustainable, especially for families at the lower-to-median end of the income spectrum. Hence, while aggregate excess savings remain elevated around $1.5 trillion, we expect we will soon see a notable pullback in consumer spending activity under the weight of inflation and elevated interest rates.”

Still, the strength of consumer spending, while good for the economy, may present challenges for the Fed.

“Even after adjusting for inflation, consumers are spending more,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a note. “It’s tempting to push for consumer ‘immunity’, but spending power still gives businesses no incentive to eliminate price increases, making the task of checking inflation more difficult for policymakers.”

The October retail sales report comes amid a slew of consumer-related economic data and retailer earnings reports ahead of the holiday shopping season.

Two key inflation instruments, consumer price index and producer price index both show the price increase has been cooling.

“The inflationary relief consumers received in October that we saw in last week’s CPI report extended to this morning’s retail sales numbers,” said Scott Brave, head of economic analytics at Morning Consult.

While inflation appears to have peaked, consumer behavior has shifted, Claire Tassin, Morning Consult’s retail and e-commerce analyst, said during an interview Wednesday.

“Everyone is more price sensitive lately,” he told Christine Romans, CNN Business’ chief business correspondent. “People are definitely changing the stores they shop at, so I can definitely see more affluent shoppers shopping at Walmart a lot, especially…

On Tuesday, Walmart reports its US sales have increased 8.2% last quarter from the previous year. The discount retailer noted that it made “strong grocery share gains,” including from high-income households.

However, on Wednesday, Target said its profit plunged 52% last quarter and income rose only 3.4% as consumers begin to feel the heat of inflation. The retailer warned of a sluggish holiday season ahead as shoppers hold back on bargains.

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