US retail sales climbed 0.9% in May, the Commerce Department reported Tuesday, as consumers kept spending even with gas prices hovering at $4.48 a gallon. The stronger-than-expected reading suggests the economy isn't cooling as fast as some forecasters had predicted — and it complicates the Federal Reserve's next move on interest rates.
May's retail numbers
The 0.9% monthly gain followed a revised 0.6% increase in April, putting retail sales well above the consensus estimate of 0.3%. Spending was broad-based: auto dealers, furniture stores and online retailers all posted gains. Restaurant and bar sales also rose, a sign that Americans haven't pulled back on dining out.
Excluding autos and gas station sales, the core number still came in at 0.4% — a solid advance that strips out the most volatile categories. That's the type of figure economists watch closely for underlying demand trends.
Gas prices and consumer behavior
Regular gasoline averaged $4.48 a gallon in May, according to AAA data, up roughly 15 cents from April. Historically, that kind of pump shock has caused shoppers to tighten their wallets. So far, it hasn't. Consumers are dipping into pandemic-era savings, charging more on credit cards and finding ways to keep spending, data from the Bureau of Economic Analysis shows.
Some retailers have warned that the trend may not last. Target and Walmart both noted in recent earnings calls that shoppers are trading down to cheaper brands and buying fewer discretionary items. But the May retail sales report suggests that overall demand remains surprisingly sturdy.
Policy complications
The strong spending number lands at an awkward moment for the Federal Reserve. Chair Jerome Powell has said the central bank needs to see a sustained slowdown in demand before it can be confident inflation is under control. But supply-side factors — not demand — are driving much of the current price pressure: energy costs, global supply chain disruptions and a tight labor market.
If the Fed raises rates aggressively to cool demand, it risks overshooting and tipping the economy into a recession. If it holds off, inflation could stay stubbornly high. The May retail data doesn't make that calculus any easier. "The economy is not cooperating with the Fed's plan," one economist at a Wall Street bank said after the release, speaking on condition of anonymity because she wasn't authorized to comment publicly.
The next test comes later this week, when the Bureau of Labor Statistics releases the May consumer price index. That report will show whether the inflation rate is starting to ease — or whether the resilient consumer is keeping upward pressure on prices.
