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Retail Sales Headline Reveals Mainstream Cluelessness About Inflation

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When it comes to the economy, inflation, and the Federal Reserve, the mainstream just doesn’t get it.

This headline from Fox Business reveals the level of confusion.

Retail sales unexpectedly edge higher in August despite soaring inflation” [Emphasis added]

Of course, retail sales rose in August because of soaring inflation — not despite soaring inflation.

And it was far from unexpected — if you understand the dynamics between rising prices and retail sales.

Retail sales rose by 0.3% in August despite a big drop in gasoline sales due to falling prices. This largely mirrors the increase in CPI last month. Overall, prices rose 0.1%, with core prices minus food and autos rising 0.6%.

This indicates that retail sales went up primarily due to the fact that people were paying higher prices.

July retail sales were revised downward to -0.4%. Again, this reflects the CPI. Prices cooled significantly in July, with a huge drop in gasoline and energy prices.

Retail sales are not inflation-adjusted, so the data always reflects rising and falling prices. When inflation is high, you should expect retail sales to tick higher, even if people cut back on the amount of stuff they actually purchase. (Unless, of course, they cut the amount of buying enough to offset rising prices.) During deflationary periods, you should expect retail sales to fall unless people up their volume of purchases.

Retail sales reflect both units sold and rising/falling prices. That means there are two ways retail sales can go up.

  1. Consumers buy a larger quantity of stuff.
  2. The price of the stuff they’re buying goes up.

Conversely, retail sales can fall in two ways.

  1. Consumers buy less stuff
  2. The price of the stuff they’re buying goes down.

In other words, just because dollar widget sales increase doesn’t mean people bought more widgets. It could be that they bought fewer widgets but paid a lot more for them. Conversely, falling sales could reflect price drops and don’t necessarily mean people bought fewer widgets.

Up until July, rising prices undoubtedly drove retail sales numbers higher. It wasn’t that people were out there buying a lot more stuff. The sales numbers simply reflected the fact that they were paying a lot more for the stuff they were buying.

For instance, in June, virtually all of the increase in retail sales can be accounted for by factoring in price increases. But the mainstream spinmeisters brushed off rising prices and focused on the fact that consumers were still spending money.

With falling gasoline, consumers got a break in July. They some of their savings on gasoline and spent it on stuff they couldn’t afford over the last couple of months. Overall, it was a wash. It should be clear that overall, people aren’t generally better off. They are still being battered by high prices. But the spinmeisters suddenly discovered prices impact retail data and focused on the fact that consumers were still buying stuff.

In August, retail sales heated up again along with CPI as the price of many goods continues to rise. Now the spinmeisters are back to focusing on the fact Americans are still spending money.

When you look at the patterns in the retail sales data, it’s pretty clear that inflation has largely (not completely) driven retail sales over the last year. Americans haven’t been spending more because they’re confident about the economy. They’ve been spending more because they have to. This is an involuntary spending spree. American consumers are spending hand-over-fist in an effort to keep up with surging prices. They’re not getting more stuff. They’re just shelling out a lot more money for the same amount of stuff they were getting before — and in some cases, less stuff.

This isn’t a cause for economic optimism.

How Are Consumers Paying for This?

Nevertheless, those who are sanguine about the economy can still point to rising or even stable retail sales and argue that despite inflation, consumers continue to spend and “provide crucial support for the economy.”

But how are they doing this?

Reuters told us that “strong wage gains from a tight labor market” are supporting spending. But despite increasing wages, they aren’t keeping up with rising prices. Real wages continue to fall.

In fact, American consumers are maintaining their spending using credit cards. Even with retail sales falling flat in July, revolving credit, primarily reflecting credit card debt, rose by another $10.9 billion, an 11.6% annual increase. Overall, Americans added another $23.8 billion to their debt load in July, pushing it to a record $4.644 trillion.

To put that into perspective, the annual increase in revolving credit in 2019, prior to the pandemic was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.

So yes, American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast-approaching. And with it depleted savings, higher interest rates and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

The question is how much longer can over-indebted consumers keep propping up this sick economy?

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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