skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

December 15, 2021

Retail Sales Stall Despite Higher Prices

By Michael J. Bazdarich, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Headline retail sales rose just 0.3% in November, with no revision to the October estimated level. We and other analysts customarily focus on “control” retail sales, which excludes sale of vehicles, gasoline, building materials and restaurants, sectors that are especially volatile in the short-term and which also are frequented by businesses as much as consumers. The more “consumer-oriented” control sales measure actually declined by -0.1% in November, with a -0.1% revision to the October level.

What made these soft prints even more noteworthy was the fact that related goods prices rose again in November. Core goods prices in the Consumer Price Index (CPI) rose 0.9% in November, only slightly less than the 1.0% rise in October. In other words, in real terms, control retail sales declined noticeably in November.

A month ago, we deprecated the strong sales gains reported for October. Between price effects and increases at store types that had seen sales declines in September and earlier, we asserted that the October report was more scattered than the headline readings suggested. Nevertheless, when consumer spending data for October were released two weeks ago, real consumption of goods saw decent October gains.

Exhibit 1: Retail Sales Trends
Retail Sales Trends
Source: Census Bureau, Bureau of Economic Analysis, Bureau of Labor Statistics, Western Asset. As of 30 Nov 21. “Control” retail sales is total sales less vehicle dealers, service stations, building materials, stores, and restaurants. Select the image to expand the view.

Suffice it to say that today’s data tilt back toward our assertion that the October sales gains were not indicative of underlying trends. As you can see in the chart, even in nominal terms, sales growth has been only halting since March, following a 1Q spurt. Allowing for price effects, real sales have been on a slightly declining trend for the last eight months.

When the economy was partially reopening last year but various service sectors were still operating under heavy restrictions, consumer spending on goods surged, partly to make up for purchases NOT completed during the shutdown and partly as consumption shifted from (unavailable) services to (available) merchandise. Since then, as reopening has spread—sort of—to service sectors and as appetites for goods have been largely sated, spending has begun to shift back to services. That is, real goods spending has languished, while services spending has moved gradually but steadily higher.

In contrast, consensus views have been that accumulated savings (unspent stimulus checks) would be unwound, driving goods spending further upward. This has not happened, at least not as yet.

The sluggishness in real consumer spending on goods is supportive of our inflation story. In a true, sustainable inflation, real spending grows alongside higher prices, as monetary policy is driving sufficient spending growth to accommodate both. In the current environment, based on presently available data, it looks as though recent increases in goods prices have come at the expense of growth in real sales and output. Spending is not growing fast enough to allow both higher prices and rising real activity levels. This suggests, for now at least, that when supply pipeline pressures peak and begin to ease, price increases will cease.

Granted, the situation is fluid, and there are a lot of moving parts. But this is our “assemblage” of the parts that are presently available.

© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.