July's retail sales report showed sales increased by nearly double what economists had expected, adding to a long list of data points that have shown a more resilient consumer than many had projected.
While the upbeat data has economists predicting the US economy won't contract over the next year as initially projected, it also has some fearing that too much exuberance may mean another Federal Reserve interest rate hike is on the horizon in an effort to keep inflation cooling.
"This robust increase won't comfort Fed officials and keeps the risk of tighter monetary policy very much on the table," Oxford Economics' lead US economist wrote on Tuesday. "Fed Chair Powell will likely strike a hawkish tone at the Jackson Hole Economic Symposium next week."
Last month, Powell responded to a reporter question over whether robust spending could reinvigorate inflation or if it's good news.
"The overall resilience of the economy, the fact that, that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy — overall, that’s a good thing," Powell said on July 26. "It’s also — you see consumer, consumer confidence coming up and things like that. That will support activity going forward.
"But you’re, you’re right, though. At the margin, stronger growth could lead, over time, to higher inflation, and that would require an appropriate response for monetary policy. So we’ll be watching that carefully and seeing how it evolves over time."
A complicated picture
Powell made those comments during the last Federal Reserve press conference following another interest rate hike that pushed interest rates to a range of 5.25%-5.50%, the highest levels since 2001. Since then, the July jobs report showed a cooling labor market but one that remains tight with unemployment historically low and wage growth, seen as potential indicator for future spending, rising 4.4%.
July's retail sales report revealed sales increased 0.7% in the month with the control group, which contributes directly to Gross Domestic Product (GDP), rising 1.0%. Economists surveyed by Bloomberg had expected just a 0.5% increase for the control group.
The two largest gainers in July's retail sales report were nonstore retailers, which includes e-commerce, and sporting goods, indicating that while services have driven spending in the post-pandemic economy, Americans are still buying goods. This, economists at Citi say, could be problematic for inflation.
"Resilience of the US consumer complicates the picture for the Fed," Citi US economics research analyst Gisela Hoxha wrote in a note on Tuesday. "Upside surprises to demand for goods mean increasing upside risk to prices for a category of inflation that has been reliably soft this year."
Still July inflation data showed the core Consumer Price Index, which strips out the volatile food and energy categories, increased 0.2% for the second straight month, marking the first time since February 2021 that core CPI rose by an amount that low in consecutive months. The report showed "convincing" signs price pressures are easing and cleared a path for the Fed to pause rate hikes at its September meeting.
July's retail sales report did little to change that narrative. As of Tuesday afternoon, investors were pricing in a 88.5% chance of a pause at the September meeting, up 2% from the week prior, per the CME FedWatch Tool.
"I don't think that their intent is to tamp down growth," BlackRock head of iShares investment strategy Gargi Chaudhuri told Yahoo Finance Live. "Their intent is on the inflation front. So if they have this environment where growth is still robust and inflation is coming down ... It's a little bit too early to say that. But we have seen two strong or two good months of weak inflation. If that continues to be the case, I don't think they need to raise rates any further."
Josh Schafer is a reporter for Yahoo Finance.
Read the latest financial and business news from Yahoo Finance