Higher Gas Prices Didn’t Adversely Affect Retail Sales or Inflation Expectations

Recent reports about American companies reveal that the economy is surprisingly resilient despite challenges stemming from the conflict in Iran.

The major concern regarding war lies in the rising crude oil prices, which have led to increased gasoline costs. This creates a complex scenario for the economy. There were concerns that elevated fuel prices might lead consumers to tighten their budgets elsewhere, potentially slowing sales and affecting jobs and incomes. Conversely, increasing gas prices could also disrupt inflation expectations, leading to a prolonged period of inflation.

Since the conflict began, the prevailing argument has focused on the risk of a recession resulting from supply shocks. Many have expressed skepticism about the impact of household inflation expectations, questioning whether they hold as much weight as traditional economic theories suggest. This skepticism is supported by the notion that empirical evidence for these expectations isn’t as strong as proponents might believe. For instance, economist Jeremy Rudd has pointed out that the theoretical basis for this view is quite shaky.

Consumers Are Spending Despite Rising Gas Prices

The retail sales data released in May served as a crucial indicator. If higher gas prices were indeed driving demand down in other sectors, that would likely show as a decrease in sales. However, it appears that consumers have managed to navigate the spike in gas prices, possibly viewing it as a temporary situation, which has helped retail sales remain stable.

The report released on Wednesday indicated that not only were sales maintained, but there was also widespread growth. Eleven of the thirteen top-grossing categories saw increases, and sales excluding gasoline rose by 0.7%. Notably, auto sales, which generally react strongly to fuel prices, increased at their fastest rate in almost a year. Even traditionally weaker areas like furniture sales showed improvement in May. Over the first five months of this year, sales are up by 3.7% compared to the same period last year.

It’s important to note that this figure reflects nominal numbers. Increases in gas station sales don’t stem from higher consumption; they are primarily a result of rising prices. Similarly, some growth elsewhere indicates consumers are simply paying more rather than buying more. Nevertheless, the uptick in nominal sales shouldn’t be overlooked. The willingness of consumers to spend more illustrates the underlying strength of the economy. Additionally, core goods prices, excluding food and energy, actually saw a decline in May, suggesting that much of the increase in retail sales that month was genuine.

Still, there are hints of consumer strain. Sales in the category referred to by the government as “restaurants and eateries” dropped by one-tenth of a percentage point, potentially indicating that people are being more cautious in areas considered discretionary, especially in services.

Declining Business Inflation Expectations

Another significant report came from the Atlanta Fed regarding corporate inflation expectations. It shows that businesses are anticipating unit prices to increase by 2.3% over the next year, down from 2.4% in April. This figure is slightly lower than the expected 2.4% inflation rate from the previous year. Essentially, businesses are viewing the recent inflation surge as a temporary situation. This doesn’t imply that inflation expectations are firmly set in place; in fact, they are trending towards the Fed’s 2% target.

While it may still be premature to declare the economy entirely safe, it’s worth noting that should a peace agreement be reached, and oil production from the Persian Gulf resumes, the risks could diminish significantly.