Retail: May Should Be Even Stronger

Expect retail sales to pick up in May, after a 10.4% rise in March and a modest 0.3% decline in April. More states and cities are lifting restrictions now that infection rates have continued to fall. Consumers are ready to respond to the opportunity. Retail sales excluding gasoline should rise 18% this year, and 8.6% for all consumer spending. All this spending is likely to boost yearly GDP growth to 6.6% at least.

All sales categories are benefiting from the surge, and have surpassed prepandemic spending levels, with the exception of restaurants. The strongest-growing sectors over the past 14 months have been sporting goods stores, e-commerce, building materials and motor vehicles. Restaurant sales will likely show the strongest growth over the next several months as more restrictions are lifted. Spending on meals out and on services will likely depend on progress in vaccinations. 59% of adults have received at least one vaccine dose so far.

Spending should continue to show strength during the rest of the year, as high savings and growing employment income take over from the initial burst of spending fueled by stimulus checks. Also, federal aid to state and local governments will reinstate more of these lost jobs, leading to more spending by rehired workers. Finally, enhanced unemployment benefits to a sizable group of laid off workers are scheduled to continue until September 6.


Inflation Surges in April

Expect much higher inflation this year, with overall prices rising 4.4%, as a reopening economy, government stimulus, and shortages combine to push prices up in many areas. Prices rose 0.8% in April from March, the largest one-month jump in 12 years. Shortages of new cars and trucks due to a lack of computer chips, plus government stimulus checks, created a run on used vehicles, whose prices jumped 10%, accounting for more than a third of the total monthly price increase. Shortages of rental vehicles pushed rates up nearly 40%. Shortages of computer chips caused computer prices to pick up 5% and TVs to rise 3%; normally, both of these prices would have declined. Shipping difficulties from China helped boost toy prices by 3%.

Now that many vaccinations have been completed, people are starting to travel again. As a result, airfares surged 10%, hotel/motel rates jumped 9%, and car insurance rates have risen 6% over the past two months, as people have started driving more. Energy prices did not rise for the first time in five months, a bright spot in the report. However, more travel this summer could bump gasoline prices up in the coming months.

This surge in inflation is going to create a quandary for the Federal Reserve, since one of the Fed’s goals is to fight inflation. But Chair Jerome Powell has indicated a commitment to keeping short-term interest rates near zero in order to push down the unemployment rate, and his analysts tell him that the inflation surge is temporary. So, it is likely that the Fed will stand pat, but if consumer demand means that businesses now have pricing power, then this could create a self-fulfilling prophecy and leave the Fed playing catchup.

Print-ready Consumer Price Index chart