U.S. retail sales continued to grow in April, but the pace of growth slowed significantly compared to the previous month, indicating that elevated gasoline prices are prompting consumers to be more cautious with spending at certain merchants. Data released by the U.S. Department of Commerce on Thursday showed that retail sales increased by 0.5% month-over-month in April, meeting economists' expectations but significantly lower than the revised March growth rate of 1.6%. Excluding gasoline station sales, retail sales grew by 0.3% in April. As these figures are not adjusted for inflation, the increase in sales may reflect higher prices rather than an actual increase in the volume of goods sold. Nine out of thirteen retail categories saw growth. Sales at sporting goods stores, online retailers, and electronics stores increased in April, while motor vehicle sales declined. As conflict in the Middle East pushed gasoline prices to their highest levels since 2022—with data from the U.S. Energy Information Administration showing a 12.3% increase in gasoline prices in April—gasoline station sales rose by 2.8%. Concurrently, grocery store spending also saw a significant increase, likely reflecting a surge in food costs during the month. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, increased by 0.5% in April, following an upwardly revised increase of 0.8% in March. This metric, often referred to as "core retail sales," most closely aligns with the consumer spending component of Gross Domestic Product.
Tax Refunds Temporarily Support Consumption The surge in gasoline prices has not yet significantly squeezed consumption in other areas, partly due to larger tax refunds this year. Data from the Internal Revenue Service shows that, as of April 25th, the average refund amount this year was $323 higher than during the same period in 2025. However, this buffer is now diminishing. Economists at PNC Financial noted that an analysis of internal data indicates "consumers are depleting their tax refund money faster than last year, particularly lower-income households," adding that they observed "a decline in the proportion of refund money being used to pay down credit card and other debt." Consumer spending, which accounts for over two-thirds of the U.S. economy, grew at an annualized rate of 1.6% in the first quarter, down from 1.9% in the fourth quarter of last year and significantly below the 3.5% growth rate in the third quarter of 2025. Lower-income consumers spend a higher proportion of their income on gasoline compared to higher-income households. With consumer confidence hitting a historic low in early May and inflation outpacing wage growth for the first time in three years, concerns are mounting that consumer spending could slow markedly this year.
Markets Reassess Federal Reserve Policy Path Although U.S. retail sales continued to grow in April, the slowdown in growth undoubtedly reflects the drag of rising prices on consumer spending and corroborates recently released inflation data. Data released on Tuesday showed that U.S. inflation accelerated further in April, with the Consumer Price Index rising 3.8% year-over-year, marking the fastest pace since 2023, driven by ongoing increases in gasoline prices due to Middle East conflict and a jump in grocery costs. If the situation in the Middle East fails to progress, the impact of persistent inflation on consumer spending is likely to be reflected in forthcoming retail sales data. Analysts point out that rising energy and food prices have a more direct impact on consumer psychology and actual purchasing power. If the prices of essential goods continue to climb, U.S. households may be forced to cut back on discretionary spending, thereby dragging down subsequent consumer demand. Gus Faucher, Chief Economist at PNC Financial Services Group, stated, "Inflation, which was thought to be under control, is re-accelerating. This is a real problem. The longer inflation remains elevated, the more pressure consumers will face." Furthermore, data released on Wednesday showed the U.S. Producer Price Index surged 1.4% month-over-month in April, the largest monthly increase since March 2022, far exceeding the market expectation of 0.5%. The year-over-year increase reached 6.0%, the highest level since December 2022, significantly above the market forecast of 4.8%. The core drivers behind April's sharp PPI increase were dual rises in energy and services prices. Data released earlier this month showed that U.S. non-farm payrolls increased by 115,000 in April. Although this was a significant drop from the unusually strong 185,000 jobs added in March, it substantially exceeded the market expectation of 65,000. This marks the first time in nearly a year that U.S. non-farm employment has grown for two consecutive months; the unemployment rate remained unchanged at 4.3% for the second consecutive month. These latest data points collectively suggest the Federal Reserve is facing a classic, pessimistic stagflation-like combination of near-term economic resilience alongside resurgent inflation. In this environment, the door for the Fed to ease monetary policy is gradually closing. The CME FedWatch Tool indicates that the market has largely priced out any possibility of interest rate cuts between now and the end of 2027. Conversely, the market currently assigns a 29% probability of a 25-basis-point rate hike by the end of this year and a 36% probability of a 25-basis-point hike by the end of 2027. Several major Wall Street banks have recently pushed back their forecasts for Fed rate cuts. These banks argue that both employment and inflation data support the case for the Fed to keep interest rates unchanged at least through the end of this year. For instance, Aditya Bhave, Head of U.S. Economic Research at Bank of America, wrote in a report on May 8th: "The data simply do not support a rate cut this year. Core inflation is too high and is trending upward. The strong April jobs report was the final straw, especially considering the hawkish rhetoric from Fed officials." Bhave and his colleagues now expect the Fed will not cut rates again until July 2027, a significant shift from their previous forecast of September this year. The current consensus summary indicates the Fed has entered a "defensive mode." Interest rates are expected to remain at 3.50%-3.75% or higher until a clear path emerges for inflation to return to 2%. Statements following the April policy decision revealed that internal divisions within the Fed between "fighting inflation" and "supporting growth" have reached their most severe level in years. As the Powell era concludes and [the new Chair] is set to take office, the June meeting will serve as a key window to observe the new Chair's policy style. However, amid persistent inflation and geopolitical risks, policy is likely to remain on hold in the near term.
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