Persistent strength in consumer spending has posed a significant challenge for the Federal Reserve in its efforts to quell inflation. The upcoming release of the June retail sales report is expected to shed light on this ongoing challenge.

Anticipated Retail Sales Growth

According to consensus estimates from FactSet, economists expect retail sales to rise by 0.6% in June compared to May. This follows a surprising 0.3% uptick in May and would mark the third consecutive month of increases in retail sales.

Driving Factors for June

Citi economist Gisela Hoxha noted in a research note on Friday that car sales are expected to be the key driver of June’s growth. As the supply of vehicles has improved, consumers have shown increased interest in purchasing cars. Stripping out auto and fuel, retail sales are projected to rise by 0.3%, slightly lower than the comparable increase of 0.4% in May. Additionally, Hoxha highlighted that restaurant sales will contribute significantly to the overall increase, as consumers continue to prioritize spending on experiences rather than material goods. However, outlays at home-improvement and clothing stores might not fare as well.

Perplexing Resilience

The resilience of consumer spending has bewildered experts for several months, considering the Federal Reserve’s efforts to reduce demand for goods and services and, consequently, combat inflation. Economists and analysts had assumed that shoppers would have drastically cut back on spending by now, given the pressure of rising interest rates and inflation. While there has been some reduction in discretionary consumption, it has not resulted in the sharp decline, referred to as a “spending cliff,” that some had predicted last year.

The Changing Landscape of Consumer Spending

The current state of consumer spending is heavily influenced by several key factors, including a robust labor market, increased wages, and the pandemic-induced savings. However, there is a growing sense of optimism among Americans about the overall economy and their personal financial situations, as indicated by a recent decline in inflation. In fact, the consumer price index only saw a modest 3% gain in June, marking the lowest annual increase in over two years.

Despite these positive developments, some economists are urging caution and highlighting potential reasons for concern. Michael Reid of RBC Capital Markets emphasizes that when excluding automotive sales, the overall spending landscape appears less encouraging, with consumers scaling back on discretionary purchases. Aditya Bhave from Bank of America goes a step further and predicts a 0.2% decline in June retail sales (excluding car sales) based on the latest data from BofA credit cards.

Bhave asserts that the recent data contradicts the assumption that the economy experienced significant acceleration during the second quarter following a slight downturn in March. Instead, it seems that we are currently in a phase of below-trend economic growth and consumer spending, albeit not indicative of a recession.

However, bringing inflation down from its current 3% level to the central bank’s target of 2% poses significant challenges. As mentioned in a recent report by _, achieving this transition may prove to be more difficult than the journey from its peak of 9% to 3%. Consequently, this suggests that the Federal Reserve will need to take further action, which could result in more hardships for consumers.

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