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Nominal retail sales growth is slowing while real retail sales have turned negative as inflation has increased. Consumer spending will likely continue to weaken against difficult comparisons, and inflation will likely remain elevated but could slow in coming months.

Throughout the course of 2022, we have been reiterating our view that economic growth and inflation would likely slow on a rate of change basis compared to 2021.  One of the reasons we mentioned is that the comparison set would be more challenging in 2022, especially starting in March.  The release of the March retail sales and consumer prices index (CPI) highlighted that point.

Advanced retail sales for the month March increased 0.40% on a month-over-month basis.  That was a decline from the 0.50% increase in February.  These numbers are reported in nominal terms, and the CPI increase in March and February were 1.2% and 0.80%, respectively.  This means on an inflation adjusted basis retail sales were negative in the last two months.  The strongest part of retail sales in those months has been gas stations.  Sales at gas stations increased 8.9% and 6.7% month-over-month in March and February, respectively.  Nominal sales growth in March, excluding gas stations, declined -0.30% month-over-month and only grew 0.20% in February (even weaker on an inflation adjusted basis).  Another strong area of growth was grocery stores, which increased 1.3% month-over-month, driven by higher food costs.  Several of the larger components of retail sales slowed on a nominal basis (even weaker on real basis) in March, with motor vehicles -1.9% month-over-month, non-store sales -6.5% month-over-month (after being down -3.5% in February), and Food Services increased 0.5% (down from 0.80% in February).       

Source: Census Bureau.

The year-over-year trend is also slowing for retail sales, on a real and nominal basis.  Year-over-year growth in March was 5.5%, down from 16% in February, and the lowest since June of 2020.  This 5.5% growth rate occurred in a month when CPI increased by 8.5% year-over-year, compared to 0.70% in June of 2020.  The acceleration in CPI means that not only has the nominal growth rate of retail sales slowed but the real growth rate has turned negative.  In April, retail sales will have the steepest comparison set, as retail sales increased by 48% year-over-year in April 2021.

Source: FRED.

Several of the major components of retail sales slowed considerably on a year-over-year basis in March (and were negative on an inflation adjusted basis) and face difficult comparisons in April.  Motor vehicles declined -1.2% year-over-year, down from 18% in February, and were up 107% in April 2021.  General Merchandise increased 5.2% year-over-year in March, down from 12.5% in February, and were up 21% in April 2021.  Non-store sales increased 1.8% year-over-year in March, down from 14% in February, and were up 16% in April 2021.  Food Services increased 6.9% year-over-year in March, down from 18% in February, and were up 53% in April 2021.

Source: FRED.

The headline CPI increased 1.2% month-over-month in March, led by an 18% increase in gasoline (which contributed over 50% of the total monthly increase).  Food price increases also had a large impact as grocery prices increased 1.5% month-over-month.  The Core measure of CPI removes food and energy, and it only increased 0.30% (the smallest increase in six months).  This deceleration may continue in the coming months as the comparison set gets steeper as Core CPI increased 0.80%, 0.75%, and 0.80% month-over-month from April-June 2021.    

Source: FRED.

The smaller increase in Core CPI highlights the divergence between price acceleration in commodities versus the other major contributors.  Used car prices declined -3.8% month-over-month in March (after declining -0.25% in February) and growth rate in shelter (largest component) has started to slow.  Owners’ equivalent rent increased 0.40% month-over-month in March, which has stayed at the same pace since September 2021.  Rental rates increased 0.40% month-over-month in March, down from 0.5% in January and February.  

Source: FRED.

Commodities continue to have a large impact on the year-over-year change in CPI.  The headline measure increased 8.5% year-over-year in March, an increase of 0.60% from the February pace.  Core CPI increased 6.5% year-over-year in March, unchanged from the pace in February. 

Source: FRED.

Part of the difference was the 70%+ increase in oil and the 7% increase in food prices. 

Source: FRED.

There is some evidence that this acceleration may start to slow in April, which would have a large impact on the acceleration in the CPI if trends in the other components hold.  The average daily price of oil (using WTI) through April 14th is -8% lower than during the month of March (compared to the 19% increase in March).  In order to maintain the same 70%+ year-over-year growth, WTI needs to average 7% more than the current April average by month end.  The May average would need to be 13% higher than the current April average to maintain the same 70%+ year-over-year growth rate. 

On the food side, the average daily closing price for wheat in April is -2% below the March average (compared to a 35% increase in March).  The year-over-year increase in March was 70% and wheat would need to average 7% higher than the current level in April to maintain that same growth rate.  The average price of corn in April is 2% above the March level, compared to the 15% increase in March.  The year-over-year increase in March was 35% and corn would need to average 9% more than the current April average to maintain that same growth rate.  Soy increased 5.5% month-over-month in March and the current April average is -2% below the March average.  The year-over-year increase in March was 19% and soy would need to average 5.5% more than the current April level to maintain that same growth rate. 

Source: Koyfin.

Other commodities related to Russia and Ukraine have also declined from their March highs, with Aluminum down -15%, Nickel down -35%, Platinum -14%, and Palladium -25%. 

Source: Koyfin.

Other components are experiencing a deceleration in year-over-year growth, like used car prices, which increased at 35% year-over-year (down from 40% in February). 

Source: FRED.

Shelter increased 5.0% y/y (which was the largest increase since 1991), but the pace of acceleration may start to slow in the coming months.  Besides the previously mentioned stagnation in the monthly growth rate for owners equivalent rent and rental rates, the Case Shiller Home index year-over-year growth rate has stalled, and the comparison gets steeper in the coming months.

Source: FRED.

This deceleration in the pace of consumer spending and prices outside of commodities may or may not influence the pace at which monetary policy makers decide to tighten.  That has the most direct impact on Treasury yields (which we discussed last week).  Other market signals continue to recognize the risks of tightening monetary policy in the face of slowing economic activity as defensive equities continue to outperform, the $US is at a two-year high, and gold has been flat during a period when two-year Treasury yields have increase 75bps (and gold mining stocks have made new highs).

Source: Koyfin.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

 

Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC