The Poisonous Impact of Inflation on Retail Sales
Alex Carrick
The April 2008 statistics on U.S. inflation and retail sales have recently been released by the Bureau of Labor Statistics and the Census Bureau respectively. The recent increases in the Consumer Price Index (CPI) are having a clear impact on shopkeepers’ activity levels.
U.S. Inflation +3.9% in April; Core Inflation +2.3%
The level of general prices in the country increased 3.9% year over year in the latest month. This was an easing of 0.1 percentage points versus the previous month. The core inflation rate (which excludes food and energy) also fell slightly from the month before and is now at 2.3%, which is not that alarming, on its own. However, the year-over-year increase in the energy sub-component index was +15.9% and, in the food sub-component index, it was +5.1%.
Current price increases might be characterized as “bottom up” rather than “top down”. The latter occurs when high domestic demand for goods bids up prices. This is not the case that is prevailing today. Instead, the driving force at this time is “bottom up”, which is the result of supply bottlenecks and/or factors that are external to domestic market conditions.
International Forces are Driving Inflation
The instances where prices are currently increasing the fastest are in energy and food. Both are being driven by external forces. In the case of energy, the international price of oil has recently set an all-time record high, at $126 USD per barrel. In the case of food, shortages around the world have raised the price for almost all staples and a variety of other agricultural products, as well as fertilizers.
The three largest sub-components of the CPI are: (1) housing (42.4% of the overall weighting); (2) transportation (17.7%); and (3) food and beverages (14.9%). Each of these is being dramatically affected by international developments. For example, within housing, the fuels and utilities index is +8.6% year over year, with fuel oil at +42.8% and gas and electricity at +6.6%. Within transportation, gasoline is +20.7% year over year. Finally, as subsets of the food and beverages index, cereals and bakery products are +8.9% and dairy and related products are +11.8%.
U.S. Total Retail Sales +2.0%, but Who’s Buying What?
Now let’s look at the latest numbers on who’s buying what. Year-over-year total U.S. retail sales are only +2.0% on a current dollar basis. This deteriorates even further when one separates out two of the product lines that are most important to consumers. Consumers have to buy a certain amount of gas (e.g., to get to work) and they have to buy food. Both of these product areas, as we have seen above, have recorded large price gains. The large price increases, in turn, have pumped up current-dollar retail sales in those specific areas.
Subtract out gasoline sales from overall retail sales and the total now falls to only +0.5% year over year. Further subtract out food and beverages and the product lines that remain recorded a current-dollar retail sales figure that was -0.3% year over year. Remember that the core inflation rate is +2.3%. This means that constant-dollar volumes of retail sales in many areas are negative.
Lines of Business that are Struggling
A prime example of an industry that is struggling is the automotive sector. Latest year-over-year auto sales are -7.3% (on an actual basis). This is despite favorable incentive packages being offered to car buyers in terms of discounts, rebates and financing terms. The latest CPI report records that the price of new vehicles is -1.3% year over year. Included in that -1.3% (and taking away from the extent of the decline) are imported cars for which prices have risen as a result of currency increases relative to the U.S. dollar.
In the sectors most affected by the depression in new home construction, furniture and home furnishing sales are -5.1% year over year on an actual basis and -6.4% on a three-month smoothed basis (see graph below). Building material and garden equipment sales are -2.0% actual and -5.8% smoothed.
Electronic and appliance store sales are +4.0% actual and +2.5% smoothed. In a related area, it is interesting to note that personal computer and peripheral equipment prices are -13.2% in the latest CPI report.
Retail Construction to be Held Back by Consumers’ Caution
The bottom line is that shoppers currently have little enthusiasm for spending in a host of retail areas. Average hourly earnings (+3.4% year over year) are less than spectacular, employment prospects are backsliding and financing is harder to line up. Retailers, and construction activity tied to retail, are likely to find the “going” to be an uphill slog for another quarter or two at least.
