U.S. Retail Sales Flat In September; Import Prices Fall Again

U.S. retail sales were unexpectedly flat in September as households cut back on purchases of big-ticket items amid stubbornly high inflation and rapidly rising interest rates.

But consumers are not rolling over yet, with the report from the Commerce Department on Friday also showing a measure of underlying retail sales rising last month. The so-called core retail sales were also stronger than previously thought in August.

"Overall, households continue to spend, supported by strong job growth and rising nominal incomes," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. "But higher borrowing costs and elevated inflation will remain headwinds for spending going forward."The unchanged reading in retail sales last month followed an upwardly revised 0.4% rise in August. Sales in August were previously reported to have gained 0.3%. Retail sales increased 8.2% year-on-year in September. Economists polled by Reuters had forecast sales would climb 0.2%, with estimates ranging from as low as a 1.1% decline to as high as a 0.8% increase.

Soaring costs for rents and healthcare are squeezing budgets for many Americans, leading them to reduce spending on goods. The situation has been compounded by higher borrowing costs, which are making credit more expensive.

The Federal Reserve has raised its policy rate from the near-zero level in March to the current range of 3.00% to 3.25% as it battles inflation. A fourth straight 75-basis-point interest rate hike is expected next month after data on Thursday showed inflation increasing strongly in September.

"While consumers remain willing to spend, many families, especially those at the lower-to-median end of the income spectrum, are feeling increasingly constrained by elevated prices and rising interest rates," said Gregory Daco, chief economist at EY-Parthenon in New York.

Sales are slowing also as spending shifts back to services. Retail sales are mostly goods and are not adjusted for inflation.

Sales at auto dealerships slipped 0.4% last month, while receipts at service stations dropped 1.4%. Receipts at furniture stores fell 0.7%, while sales at building material and garden equipment retailers decreased 0.4%.

Sales at electronics and appliance stores declined 0.8%. There were also decreases in sales at hobby, musical instrument and book stores, a sign that consumers were cutting back on discretionary spending.

But sales at clothing and general merchandise stores rose 0.5%. Online and mail-order retail sales also gained 0.5%. Receipts at bars and restaurants, the only services category in the retail sales report, increased 0.5%.

U.S. stocks opened higher. The dollar rose against a basket of currencies. U.S. Treasury prices were mixed.

UNDERLYING STRENGTH

Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.4% last month. Data for August was revised higher to show these core retail sales rising 0.2% instead of being unchanged as previously reported.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. The increase in September and upward revision to August core retail sales left economists expecting that growth in consumer spending likely topped a 1.0% annualized rate in the third quarter after increasing at a 2.0% pace in the April-June quarter.

GDP is expected to have rebounded last quarter after two straight quarterly declines, as slowing domestic demand curbs imports and leaves a stockpile of unsold merchandise in warehouses.

The Atlanta Fed is estimating that GDP increased at a 2.9% rate last quarter after falling at a 0.6% pace in the second quarter. The government is scheduled to publish its snapshot of third-quarter GDP at the end of this month.

But there are some glimmers of hope in the fight against inflation. A separate report from the Labor Department on Friday showed import prices dropped for a third straight month in September, pulled down by falling costs for petroleum products and a strong dollar, suggesting that imported inflation pressures were subsiding as global supply chains improve.

Import prices decreased 1.2% last month after declining 1.1% in August. In the 12 months through September, import prices increased 6.0%, the smallest rise since February 2021, after advancing 7.8% in August.

Imported fuel prices dropped 7.5% after decreasing by the same margin in August. Imported petroleum prices also fell 7.5%, while the cost of imported food rebounded 0.2%.

But oil prices have likely bottomed following last week's decision by the Organization of the Petroleum Exporting Countries and allies to cut crude production.

Excluding fuel and food, import prices fell 0.5%. These so-called core import prices dipped 0.1% in August. They increased 3.3% on a year-on-year basis in September. The strength of the dollar is helping to limit the increase in core import prices.

The dollar has gained 10.5% against the currencies of the United States' main trade partners since January.