U.S. Retail Sales Grew by 3.8 % in January 2022

Sales rose sharply as inflation surged to 40-year high.

By guest author Harriet Torry from the Wall Street Journal.

Caption and graphic courtesy by the Wall Street Journal

U.S. shoppers sharply boosted retail spending last month as inflation surged to a 40-year high and the Omicron wave of Covid-19 eased.

Sales at retail stores, online and restaurants rose by seasonally adjusted 3.8 % in January from the prior month, the Commerce Department said Wednesday. That marked the strongest monthly gain since last March when pandemic-related stimulus was being distributed to households. The jump in retail spending last month also represented a rebound from December, when sales fell by a revised 2.5 %.

Increased spending was broad-based, with large gains for purchases of vehicles, furniture and building materials. Online sales also rose sharply. Restaurant and bar receipts dropped last month as consumers limited in-person services during the latest Covid outbreak.

Consumer inflation rose at its fastest pace in nearly 40 years last month, eroding consumers’ spending power as wages rose more slowly than the price of most goods and services.

“2022 is going to feature this very delicate rebalancing act for the entire economy, and in particular for U.S. consumers living in this world where prices are higher and purchasing power is more constrained,” said Gregory Daco, chief economist at consulting firm EY-Parthenon.

Retail spending has been choppy in recent months as consumers face rising inflation and supply-chain disruptions because of the Covid-19 pandemic, despite relatively robust household finances and a strong labor market. Unlike other economic-data reports produced by the U.S. government, retail sales aren’t adjusted for inflation. That means higher retail-sales figures can reflect higher prices rather than more purchases.

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Supply shortages are expected to ease this quarter, economists said. An increase in inventories contributed an outsize share of U.S. gross-domestic-product growth in the fourth quarter, suggesting supply-chain issues were starting to improve.

Inflation, however, is showing few signs of slowing down. Suppliers sharply boosted prices last month, the Labor Department said Tuesday, in a sign upward pressure on already high consumer inflation continued to build at the start of the year.

The Commerce Department’s retail-sales report doesn’t cover spending on services, other than restaurants. Services likely bore the brunt of a pullback in spending in early January because of the Omicron variant, only part of which is reflected in the retail-sales report.

Economists expect purchases of goods such as electronics and furniture to decline and for services spending to pick up as the latest pandemic wave eases. That in turn could take some pressure off goods inflation, with more people returning to dining out, travel and entertainment.

There are early signs of this shift in spending patterns. Spending rose 12% year-over-year for the week ended Feb. 5, according to Bank of America credit- and debit-card data. Spending on airfares, lodging, entertainment and dining out all improved from levels seen just before the start of the pandemic, the bank found.

Still, high inflation has taken a toll on consumer sentiment in recent weeks. The University of Michigan’s preliminary index of consumer sentiment hit its lowest level in a decade in February as households fretted about rising prices and crimped financial prospects.

The Conference Board’s consumer-confidence index also declined in January because of weaker short-term growth prospects, although the proportion of consumers planning to purchase homes, vehicles and major appliances over the next six months increased.

Many consumers are finding their dollars aren’t going as far as before the pandemic.

Jennifer Morrison, a risk-management executive in Columbus, Ohio, said she recently paid around 20 % more to replace a sofa bed compared with the one she bought two years ago for a property she rents out through Airbnb Inc. “We compromised to get it here faster, it’s not exactly what we wanted,” she said, adding she found little in stock at her local IKEA and long wait times for furniture from other retailers.

Ms. Morrison, who plans to retire later this year, said she also is making fewer trips to visit her family, in part because of gasoline prices. She also is eating out less and turning to less-costly cuts of meat at the grocery store.

“Since the pandemic, we would eat out three nights a week. Now it’s probably only once a week,” the 60-year-old said.