U.S. retail sales are through the roof, up 20 percent. This increase began even before the pandemic began. This walloping increase can all be due to price inflation and not an increase in consumer purchasing power at all.
Changing pricing, changing behavior
The dynamics of retail sales since April 2021 tell a story of a difficult relationship between pricing and consumer behavior.
That happened during the first rebound from the pandemic lows in retail sales of less than $400 trillion in mid-2020. Largely back to pre-pandemic levels of close to $500 trillion. Chief amongst those historic shifts, by July 2021 retail sales had soared well past $600 trillion—capping a nearly historic rebound. Beyond that, after October 2023, retail sales continued climbing steeply month over month. Dive just beneath the surface of this growth and you’ll find a more tragic story.
Despite this small increase in nominal sales numbers, inflation-adjusted sales have been flat since their peak back in April of 2021. They have been able to remain in a tightly-controlled range of $550 trillion to $575 trillion. This has led to stagnation when it comes to growth in real terms. Over the last 12 months, retail sales skyrocketed an unexpected 15.9 percent between July 2021 and July 2022. That increase is almost entirely because of increased prices, not because of an increase in consumer demand.
For example, in May 2023, as overall retail sales totaled $715.4 billion, higher inflation adjusted numbers may misrepresent the effect of inflation across the retail landscape. Continued inflationary pressures have shifted consumer behavior more online. For example, when the price of a widget increases from $1 to $2, consumers will probably buy fewer widgets despite the fact that sales revenue seems to be going up. They initially purchased 100 widgets at $1 a piece, for a total of $100. Now, because we are forcing them to buy just 60 widgets at the higher price, this pushes their retail sales up to $120 retail. This unfair situation drives home the point that inflation can make growth look like shrinkage.
The Consumer Price Index (CPI) often comes up when discussing inflation and the impact on our purchasing power. The measure has come under fire though for allegedly lowballing the true rate of price hikes. So in the 1990s, the administration changed the CPI formula. This adjustment raised alarm because many believe it fails to capture the full extent of the exorbitant price increases that consumers are facing. If we use the CPI formula of the 1970s, we could be looking at a tenfold jump in price. In reality, the real increase may be almost twice what’s been documented thus far.
With inflation still very much a player in the retail sales game, economic analysts are still wary of reading too much into these figures. Retail sales may be up, but that doesn’t automatically imply consumers are more confident or have more spending power. Rather, this growth could simply be a reflection of increased costs for the items we purchase.