Americans cut back on spending in December, the second consecutive month they’ve done so, underscoring how inflation and the rising cost of using credit cards slowed consumer activity over the crucial holiday shopping season.
Retail sales fell 1.1% in December, following a revised 1% drop in November, the Commerce Department reported Wednesday. In October, retail sales ticked up 1.3%, helped by early holiday shopping.
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Auto sales declined as rising interest rates for auto loans crimped demand. That, and falling gas prices, helped to pull overall retail sales lower.
The Fed raised its key interest rate in December for the seventh time in 2022 for exactly that reason as it tries to cool spending and inflation.
Yet even excluding sales from auto and gasoline, retail sales slipped 0.7%. Retail sales are not adjusted for inflation unlike many other government reports.
Sales fell 1.1% at electronics and appliance stores; furniture and home furnishing stores saw a 2.5% drop. And department stores suffered a 6.6% decline.
Spending had remained resilient despite a spike in inflation that began almost 19 months ago, but the capacity of Americans to continue that spending has ebbed.
Solid hiring, rising pay, and savings beefed up by government financial support during the pandemic enabled most Americans to keep up with rising prices. That government assistance has long ended, however, and some Americans have dipped into savings accounts since then. Credit card defaults are on the rise with some households slow to adjust their spending to a new reality.
Still, the job market continues to be a pillar of strength in the U.S. economy and wages are still rising, creating a conflict for the Fed, which needs to cool spending and hiring to control inflation.
Inflation does appear, at least at the moment, to be in retreat. Inflation fell to 6.5% in December, the sixth consecutive month of declines.
On a monthly basis, prices actually slipped 0.1 percent from November to December, the first such drop since May 2020.
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Goods are still a lot more expensive than they were last year, however, and that has begun to become evident in the bottom line for many major retailers.
Macy’s tempered its quarterly sales outlook this month after customers spent less than expected during the lull between Thanksgiving weekend and the final days before Christmas. And upscale yoga pants maker Lululemon warned that profit margins for the fiscal fourth quarter will be squeezed as shoppers focused on discounts.
Later on Wednesday the National Retail Federation, the nation’s largest retail trade group, will release final holiday sales figures for November and December.
Major retailers including Walmart and Target release details on their fourth quarter performances next month.
Jack Kleinhenz, chief economist at the National Retail Federation, expects companies to manage inventories more tightly in 2023 after being forced to heavily discount goods last year due to an enormous amount of unsold merchandise.
“I think they are going to be very cautious because of what happened,” Kleinhenz said.
The retail report released Wednesday covers only about a third of overall consumer spending and doesn’t include services such as haircuts, hotel stays and plane tickets.
The Associated Press contributed to this article.