Consumer Spending Grows, Despite Inflation and Higher Rates

June 16, 2023

Americans continued to open their wallets last month in the latest sign of consumers’ resiliency in the face of still-high inflation and higher interest rates.

Retail spending, which includes spending in stores, online, and in restaurants, increased by a seasonally adjusted 0.3% in May from the month before, according to the Commerce Department. That follows April’s strong 0.4% increase and further complicates the mixed signals coming from economic data as of late.

This makes the Federal Reserve’s path more complicated. After aggressively raising rates over the past year to combat inflation, Fed officials held rates steady at their meeting this week, but signaled that they are likely to raise rates again in coming months.

Thus far, consumers seem to have shrugged off the effect of higher interest rates. In addition to spending more on things like groceries and restaurants, Americans also shelled out more at car dealerships and home-improvement stores. Big-ticket items like cars and home appliances are typically purchased on credit, so higher rates usually curb sales. 

Americans also benefitted from declining gas prices. Lower prices at the pump leave consumers with more money to spend elsewhere. In fact, when gasoline purchases are excluded, retail sales rose by an even more impressive 0.6% in May.

At the same time, retail spending over the past 12 months has grown more slowly than inflation, and unlike much economic data, retail sales are not adjusted for inflation. This means that consumers may not actually be consuming more, but just maintaining pace with climbing prices.

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