Despite high inflation, spending jumped at the beginning of this year, but that shopping spree seems to be declining.
Key Details
- Retail spending dropped 0.4% in February, according to a Commerce Department report released Wednesday.
- The decline follows a January shopping spree that surprised economists and shifted the Federal Reserve’s plans for reducing inflation.
- Spending in department stores saw the most significant decline with overall outlays declining 4%. Customers purchased 2.2% less at restaurants and bars and 2% less on vehicles.
- Spending on home improvement and gardening supplies, clothing, and furniture also fell.
- While inflation has declined somewhat, prices are still around 6% higher than a year before, NPR reports.
- Though retail purchasing declined overall, money directed to groceries rose 0.6% and online shopping increased 1.6%. Retail spending remains 5.4% higher than in February last year.
Why it’s news
A spending slowdown could be a positive sign for the Fed, which has been raising interest rates to cool the economy and slow inflation. Despite interest-rate hikes over the last year, shopping has remained undeterred by the Fed’s efforts.
Though the Fed is expected to raise rates again at its meeting next week, the decline combined with the recent collapse of two banks could affect the Fed’s decision.
The Fed is navigating a difficult road, attempting to bring inflation back to its target rate of 2% without triggering a recession. Inflation is at 6.4% now.
As the Fed has aggressively increased interest rates, the labor market has remained tight, though wage growth did start to slow last month. Consumers have shifted spending to focus more on experience-based purchases, such as travel, entertainment, and restaurants.
In part, the increased spending is due to overall higher prices. Even if a person is buying the necessities, his spending may be more than last year because the prices of basic goods have increased.
Some department stores have reported fewer sales on big-ticket items but have made up for lost revenue in other departments where the prices have increased, NPR reports.
Backing up a bit
Consumer spending is up, but some consumers may not be buying more items than usual—the prices of basic goods are just higher. Nestlé, the owner of more than 2,000 food brands, says that its prices on basic items will increase this year.
Though the company increased its prices 8.2% last year, it says that these increases were not enough to offset rising production costs, which are eating into profit margins.
“We are still in a situation where we’re repairing our gross margin and, like all the consumers around the world, we’ve been hit by inflation, and now we’re trying to repair the damage that has been done,” Nestlé CEO Mark Schneider explains.
The planned price increases will be “very targeted” and will only affect the areas Nestlé says are necessary. Schneider did not share which of the company’s 2,000 brands would be affected. Nestlé’s catalog of brands covers everything from chocolate to dog food to baby formula.
Other companies such as Coca-Cola, Pampers diapers producer Procter & Gamble, Colgate-Palmolive, and brewer Heineken have all announced price increases as the companies deal with higher production costs, energy, and labor.
Raw materials like dairy are still expensive, though prices have declined from peaks last year. Consumers can expect prices on nearly all food items to increase this year, CNN reports.
