Retail sales data signals consumer caution during the holidays

Slowing growth

While retail sales continue to grow, there are signs of a slowdown. Year-over-year growth for December 2022 posted the slowest growth in 22 months, according to GlobalData Managing Director Neil Saunders. The rate of increase has nearly halved since August, when it was 10.2%.

“Some of this is down to moderating inflation, but some is also a consequence of a more pressured and concerned consumer who has become more frugal about spending,” Saunders said. “If this pattern is emerging over the holidays – a time when people tend to throw caution to the wind as they spend to enjoy themselves – it does not bode well for the sober months of January and February which are traditionally more subdued and constrained as consumers assess their finances and pay down holiday debt.”

What the holidays say about 2023

The latest data offers another warning sign: Things may get harder in retail in 2023. Saunders said that recent months have shown that it is “quite clear that the year ahead will be much tougher” than 2022. But he warned that it is important not to be “overly pessimistic.” Consumer spending has mostly held up over three years of a pandemic, supply chain chaos and inflation. At the same time, the inflation rate is coming down.

“As such, what we are likely to see is a trimming at the edges of retail, as people continue to adjust behaviors and shopping patterns to make ends meet, rather than a full-blown retail recession,” Saunders said.

Inflation remains high in some categories, offering a reminder that this period of high prices is not yet over just because the calendar turned to a new year. The price increase in food for December was 11.8%, according to the Consumer Price Index. That was well ahead of the 6.5% overall inflation rate, and continues to lead consumers to make choices.

“Across the whole holiday period our data show that consumers were working hard to reduce costs by trading down to value retailers, buying more own brand product, and modestly cutting the amount they buy,” Saunders said. “Many households were less wasteful with food over this holiday period, and retailers had to work a lot harder to stimulate sales.”

The month-over-month decline seen this month is also a somehwat ominous sign, but there could be a silver lining, according to a note from Bank of America Global Research. While the bank's economists said holiday spending appears "soft," technical details of the data could provide a lift to start the year.

"Seasonal factors have not fully adjusted for the shift to more front-loaded holiday shopping since the start of the pandemic," BoA wrote. "Therefore, the seasonal adjustment likely exaggerated the weakness in retail sales in December. If this is correct, we should see a big bounce in retail sales, and consumer spending more broadly, in January."

Wholesale prices decline

Another sign of easing inflation showed up in the U.S. Commerce Department’s report on wholesale prices.

According to the Producer Price Index:

Prices for goods before they reach retail declined 0.5% in December.

The year-over-year wholesale inflation rate was 6.2%, the lowest of the last 12 months.

This was driven by a sizable decrease in the price of goods at 1.6%. Energy prices also declined 7.9% for the month.

This came after an increase in wholesale prices in October and November.

The Producer Price Index tends to be a forward-looking measure of inflation that tracks prices of goods and services before they reach consumers.