Retail Sales Surge as Prices Rise and Shoppers Keep Buying

Retail sales surged in January, a sign of the resiliency of consumers as prices continued rising at a rapid pace. It was also good news for retailers but a potential worry for the Federal Reserve as it tries to slow the economy to rein in inflation.

U.S. retail sales in January increased 3 percent from the previous month, much higher than the 2 percent increase expected by economists in a Bloomberg survey. That’s a reversal from the 1.1 percent decline posted December, and the biggest jump since March 2021.

The data, which can be volatile month to month, is adjusted for seasonality but does not account for price changes, meaning that inflation — which cooled very slightly in January, but showed signs of stickiness — contributed at least partly to the monthly jump.

Nearly every retail category saw a lift in sales last month, with car dealerships, furniture sellers and electronics stores recording some of the largest increases. Sales at department stores were flat; the post-holiday shopping season is usually among the slowest selling season for department stores.

The robustness of shoppers at the beginning of the year could make retailers more optimistic about their businesses in 2023. There have been concerns that consumers could pull back as they contend with rapid price increases and burn through savings, shrinking retailers’ profit margins and lowering their sales. But the labor market has remained strong and wage growth solid, keeping cash in people’s pockets and helping to power continued spending.

The Fed has raised interest rates aggressively over the past year to try to weigh on consumer and business demand, hoping to cool the economy enough that it forces companies to stop raising prices so much. Central bankers have pushed borrowing costs to above 4.5 percent, from near-zero at this time last year, and have forecast at least a couple more rate increases in the coming months.

But those adjustments — the most drastic since the 1980s — seem to have temporarily dimmed strong demand rather than snuffing it out decisively. The housing market has cooled and consumer spending had shown clear signs of pulling back in recent months, but the labor market has remained very strong and some parts of the economy appear to be on the brink of accelerating again.

Even after stripping out cars and gas, retail sales picked up by 2.6 percent in January, much faster than the 0.9 percent economists in a Bloomberg survey had expected. Spending may have been lifted in part by a significant cost of living adjustment that arrived in Social Security checks last month, increasing income for many older Americans.

Economists were keenly focused on the retail sales numbers for January. Several — including Tiffany Wilding at PIMCO and Maria Vassalou at Goldman Sachs Asset Management — suggested a strong retail sales number could prompt Fed officials to mark up their rate path, taken together with rapid job growth and an inflation report that suggested price increases are proving more stubborn than many had expected.