High Gas Prices Did Not Hurt Retail Sales or Push Up Inflation Expectations
A pair of reports on American businesses suggests that the U.S. economy was remarkably resilient against the pressures created by the Iran War.
The biggest economic dangers of the war arose from the surge in oil prices and the sharp rise in gasoline prices this triggered. This created a double-edged risk for the economy. On the one side, there was the prospect that higher fuel prices would force consumers to pull back on spending elsewhere in the economy, causing a slowdown in sales that could spread to the labor market, business income, and household income. On the other hand, there was the danger that the higher prices at the gas pump would unmoor inflation expectations, giving rise to persistent inflation.
We’ve argued since the start of the war that the danger of a supply-shock-induced slump was the greater threat. For one, there’s good reason to be skeptical of the idea that household inflation expectations have as much power as the standard theory—the one that holds sway inside the Federal Reserve—posts. The direct empirical evidence for the expectations channel has always been weaker than its proponents think. And the theoretical foundations are, as dissident Fed economist Jeremy Rudd argued in a paper published back in 2021, “extremely shaky.”
Consumers Shopped, Didn’t Drop
The retail sales figures released in May were a crucial test. If high gas prices were pulling demand away from other sectors of the economy, we would likely first see it in declining sales. If consumers were weathering the gas price shock, perhaps taking the view that it is likely to be temporary, then retail sales would hold up.
The report released Wednesday showed that sales not only held up, they increased broadly. Eleven of the 13 top categories of sales showed expansion. Sales excluding gasoline rose 0.7 percent. Auto sales, which are particularly sensitive to gas prices, rose at the fastest pace in nearly a year. Even parts of the retail economy that have been weak—like furniture sales—showed strength in May. In the first five months of this year, sales are up 3.7 percent compared with the period a year earlier.
It’s true that these are nominal figures. They do not reflect price increases. Sales at gas stations are up sharply not because people are consuming more gasoline but because gas prices are up. Similarly, some of the increases elsewhere in the report reflect consumers paying higher prices rather than buying more. But nominal sales increases should not be dismissed. The fact that people are able and willing to spend more shows economic resilience. What’s more, core goods prices—excluding food and energy—actually fell in May, according to the Department of Labor’s consumer price index. So, much of May’s increase in retail sales was real.
There was a small signal of consumer stress. Sales at what the government quaintly calls “food service and drinking places” dipped by a tenth of a point. This could reflect consumers pulling back on the most discretionary part of the report—and the only one that is mostly services.
Business Inflation Expectations Declined
The other important report this morning came from the Atlanta Fed’s survey of business inflation expectations. This showed that businesses expect unit costs to rise by 2.3 percent over the next year, down from 2.4 percent in April. That is also slightly below last year’s expectation of 2.4 percent and the 2.4 percent inflation they reported having experienced over the next year. In other words, businesses look at the recent surge of inflation as temporary. Inflation expectations are not becoming unanchored. They are actually moving down, toward the Fed’s two percent target.
It’s probably too early to say that we’re completely out of the danger zone for the economy. But if the peace deal sticks and the flow of petroleum from the Persian Gulf resumes, the risks will be safely behind us.