Despite rising costs, consumers keep spending

Christopher Rugaber
The Associated Press

WASHINGTON — U.S. retail sales rose 0.9% in April, a solid increase that underscores Americans’ ability to keep ramping up spending even as inflation persists at nearly a 40-year high.

The increase was driven by greater sales of cars, electronics, and at restaurants, the Commerce Department said Tuesday.

Even adjusting for inflation, which was 0.3% on a monthly basis in April, sales increased. Gas prices fell slightly last month, restraining inflation, after soaring in March in the aftermath of Russia’s invasion of Ukraine.

Spending increases: Consumers are providing critical support to the economy even after a year of seeing prices spiral higher for gas, food, rent, and other necessities. The economy contracted in the first three months of the year, but consumer and business spending still increased at a healthy pace.

“Never bet against the U.S. consumer has always been a good adage,” said Paul Ashworth, chief U.S. economist at Capital Economics, a consulting firm, in a note to clients. “Despite the surge in prices weighing on their purchasing power, the U.S. consumer now appears to be single-handedly keeping the global economy afloat.”

The Tuesday report also showed that sales in March were revised much higher, to a gain of 1.4%, from 0.7%. As a result, spending even rose that month after adjusting for inflation, which surged to 1.2% as gas prices rose. The revision suggests the economy likely shrank by less than the 1.4% contraction that was reported last month.

The strength of the consumer makes a recession much less likely, at least anytime soon, Ashworth said. But it also keeps the pressure on the Federal Reserve to tighten borrowing costs in order to cool the economy.

Financial health: Strong hiring, rapid wage increases, and a healthy level of savings — on average — have bolstered consumers’ financial health, despite a sharp increase in consumer prices of 8.3% in April compared with a year ago. The increase was just below a four-decade high reached in March.

Still, economists are watching closely to see if consumer spending can continue to outpace inflation. Slower spending would drag down the economy’s growth. While that might bring down inflation, it would also threaten to push the economy into recession.

Inflation is still disrupting many retailers’ businesses, even if sales increase. On Tuesday, Walmart reported an unexpected drop in profit in the first quarter, even as its sales rose. Company executives said rising costs for fuel, food and labor boosted its expenses.

And for lower-income Americans, inflation is taking a harder toll and forcing many people to adjust their spending patterns. Walmart executives told analysts Tuesday that some customers were switching to cheaper store brands from national brands as they juggle higher costs.

More customers are buying half-gallon jugs of milk, instead of a full gallon, company executives said. Milk prices have leapt 15% in the past year, according to government data.

The robust sales figures in the report are impressive since retail sales covers only about one-third of consumer spending, with the rest going to services such as travel, haircuts and health care. Airlines and hotels report strong sales as more people are traveling after postponing trips amid the pandemic.