Ecommerce expected to reach $1 trillion as retail sales meet inflation

Retail sales fall

Retail sales for May 2022 decreased 0.3% month-over-month, the US Department of Commerce. Year-over-year, retail sales increased by 8.1% year-over-year.

The year-over-year increase shows that sales continue to rise against a wide timeline. However, the focus for the moment is on tracking inflation's impact on consumer spending in the current moment. As a result, many reports on the results are zeroing in on the month-over-month dip as a sign that demand is starting to fall as prices rise. Given that the retail sales data followed on the heels of last week’s report of the Consumer Price Index showed 40-year-high inflation, it makes sense. Add to this that it was the first monthly decrease in five months and that the decrease was unexpected to analysts, Reuters reported.

It’s also important to pay attention to where the increases in spending occurred.

According to a National Retail Federation calculation that excludes sales at automobile dealers, gas stations and restaurants to focus on core retail categories like apparel, beauty and home goods, May’s retail sales were unchanged from a month before, while rising 6.7% year-over-year. A few of the largest changes took place in furniture stores (up .9% month-over-month), grocery stores (up 1.2% month-over-month) and electronics stores (down 1.3% month-over-month).

“There have been swings across sectors that reflect the impact of both higher prices and supply chain disturbances, and higher interest rates are expected to curb spending going forward," NRF Chief Economist Jack Kleinhenz said, in a statement. “As inflation continues, consumers are looking for ways to stretch their dollars by saving less, tapping into savings accumulated during the pandemic and increasing their use of credit.”

This all proved to be a prelude to an announcement Wednesday afternoon by the Federal Reserve that it will raise its benchmark interest rate by 0.75%, the highest increase since 1994.

While the interest rates functionally make borrowing more expensive, the desired impact of the increase is to cool off the economy. In turn, that has impacts on other parts of the economic picture – notably, the demand that is reflected in retail spending. A decline in retail sales could be welcome news at the Fed, even if it’s not for brands and retailers.

It's unlikely to be the last move of this kind. In its note announcing the rate increase, the Fed said that additional action is likely.

Ecommerce and in-store: Different trajectories

Meanwhile, according to data from Mastercard SpendingPulse, total US retail sales excluding automotive increased 10.5% year-over-year in May, and 21.4% compared to the pre-pandemic month of May 2019.

The data showed that in-store sales were a key driver of this uptick, as they rose 13.7% compared to pre-pandemic levels. The SpendingPulse is based on aggregate spending data in the company’s payments network.

Ecommerce, meanwhile, had more modest year-over-year growth of 2.2%. On the Department of Commerce’s measure of ecommerce and other nonstores sales, sales were down 1% month over month seasonally adjusted, and rose 7% year-over-year.

Yet it can help to take a look at the bigger picture. MasterCard’s data showed ecommerce growth of 99.1% when compared to May of 2019. It’s another data point that reinforces how ecommerce spending is moderating, but on the whole rose dramatically over the last two years.

Ecommerce to reach $1 trillion in 2022

It’s against that backdrop that Insider Intelligence released results of a retail forecast showing that US ecommerce spending is on pace to cross the $1 trillion mark this year. Revising its forecast down slightly from Q1, total spending in ecommerce for 2022 is expected to be $1.05 trillion.

The Insider Intelligence forecast shows slowing growth. The current forecast expects a year-over-year increase of 9.4% over last year, with ecommerce share making up 15% of total US retail sales. That would be a slight increase from 14.6%, where it has been for the last two years.

This comes as Insider Intelligence is forecasting overall retail sales to rise $6.988 trillion, up from the $6.796 trillion in the Q1 forecast. That would bring 6.4% year-over-year growth. Again, however, the main driver is a macro force: Inflation and higher fuel prices are driving sales up.

Within this data, all of the narratives listed at the outset are represented. The points are beginning to connect. Inflation is starting to have an impact on retail sales, while in-person shopping appears to be ticking up as ecommerce sales flatten out following a period of historic growth. Even if they seem to conflict at times, all of the points can be true at the same time. To be sure, this is just one point of the story arc.There are plenty of questions going forward. For instance:

• How much further action will the Fed take?
• What will the on-the-ground impacts of the Fed’s actions look like?
• Will in-store sales continue to rise, or is this a correction period?

The answers will continue to shape the narrative.