US economists watch retail sales

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Retail sales fell unexpectedly in December, which economists said could be a signal that the persistent rise in inflation is leading to a decline in consumer spending.

Consumers paid more for everything from groceries to cars in 2021 as companies passed on the costs of more expensive raw materials and supply chain delays. Spending remained strong on pent-up demand throughout the year, despite rising costs and longer waits for big-ticket items like cars and furniture.

Inflation pressure has mounted, however, as have concerns that consumers will eventually cut back on spending as they tire of higher prices hitting their wallets with no relief in sight.

Too much shouldn’t be read into a single report, said Jeff Buchbinder, equity strategist for LPL Financial. “But it underscores that the stakes are high in the fight against inflation, with rising prices eroding purchasing power.

The persistent rise in inflation has made goods more expensive everywhere, reducing purchasing power by encouraging people to spend more of their money on the same items.

Retail sales fell 1.9% in December, a key holiday season month for many retailers. Economists had expected a balanced month, due to increased consumer spending in November as companies warned of product shortages and shipping delays at the start of the holiday season.

Retail sales haven’t fallen much since the start of 2021 and the drop this time came in the same month that inflation soared by multiple measures.

“We had a lot of momentum when we last spoke to you in December,” Abercrombie & Finch CEO Fran Horowitz told investors in a recent financial update. “But as the revenue came in, we just didn’t have the inventory to keep up with the demand.”

The apparel company joined several others in early January, warning that inflation and supply chain issues would hurt financial forecasts, including paint maker Sherwin-Williams and medical products maker Cardinal Health.

The Department of Labor reported that inflation jumped to its fastest pace in nearly 40 years, compared to a year earlier. The consumer price index had already risen steadily throughout 2021 as the surge in demand far exceeded supply for many commodities and goods. Used car prices soared more than 37%, furniture prices rose 14%, and everything from groceries to gas also rose.

Companies, faced with higher costs that threatened their profits, raised prices in the hope that people would pay without changing their habits too much. That has helped profit margins soar in 2021 to their highest levels in more than a decade, but companies are now warning investors that rising costs are blunting some of their financial forecasts.

Prices at the wholesale level jumped a record 9.7% for all of 2021, setting an annual record.

“December was a tough month for the American consumer,” said Anu Gaggar, global investment strategist for Commonwealth Financial Network.

But, she said, much of that drop could be the result of product shortages preventing consumers from spending. More data in the coming months will provide a clearer picture of whether inflation is stifling spending.

Rising inflation and its impact on economic growth also prompted the Federal Reserve to step up its efforts. The central bank is preparing to accelerate interest rate hikes this year, which would make borrowing for a home or car more expensive and help cool parts of the economy.

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