Retail sales fell 0.6% last month, according to the Census Bureau, as consumers see inflation eroding their buying power. This decline was well short of forecasts, following a 0.2% increase in June. The Census Bureau reported that sales at gas stations and auto dealers decreased 0.9% and 2%, respectively.
Retail Sales Decline
Lower gas sales reflected cheaper prices at the pump. Even excluding those two volatile categories, however, retail sales declined. Weakness in retail sales and a report that the labor market shed 23,000 jobs last month are bad news for workers and consumers, according to Chris Zaccarelli, chief investment officer for Northlight Asset Management.
Inflation, having exceeded the 2% target of the Federal Reserve for more than five years, is eroding consumers’ confidence in their purchasing power, Joanne Hsu, director of the University of Michigan’s surveys of consumers, said. Consumer sentiment fell 8% this month after two straight months of improvement, Hsu said, reporting on preliminary data for August.
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Although the early-month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree. These groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation.
Consumer expectations for business conditions fell 11% for the short run and 17% for the long run, Hsu said. The slump in sentiment spanned partisan lines, she said. The mood among Republicans showed the biggest decline, slumping 19% below the start of the war with Iran and hitting the lowest level since the 2024 election.
Only 8% of consumers believe their incomes will grow faster than inflation this year, a 10 percentage point decline from December 2024, Hsu said.
Inflation Impact
Richmond Fed President Tom Barkin said, “Real incomes over the last year are down.” He also stated that “consumer sentiment has responded, with 2026 producing the three lowest monthly readings in the 70-plus-year history of the University of Michigan Surveys of Consumers.”
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The consumer price index excluding volatile food and energy prices rose 2.5% for the 12 months ending in July after a 2.6% gain in June. Inflation including all items increased 3.4% on an annual basis after rising 3.5% in June as energy prices last month fell 1.5%, the Bureau of Labor Statistics said.
This month the price of gasoline and other energy commodities have increased amid a flare-up in the U.S.-Iran conflict. Barkin said, “Inflation has been too high for too long, risking an upward shift in the price expectations of firms and consumers.”
The data “reduces the urgency at the Fed to raise rates to fight too-high inflation,” according to Chris Zaccarelli, chief investment officer for Northlight Asset Management.
