Would Revived Inflation Be A Sucker Punch For Retailers?

U.S. retail sales were up again in May as confident shoppers spent 0.8% more compared to April and 5.7% more compared with a year ago, according to the Census Bureau.

But lurking in other government reports are trends that could take the wind out of the sails of consumer spending, thus impacting already struggling retailers and their landlords.

inflation, shrinking dollar

Namely, inflation has made a small but distinct return recently, with the Bureau of Labor Statistics reporting that the Consumer Price Index gained 2.9% year over year in May, the highest rate in about five years. Compared with April, prices were up 0.2%. The cost of gas and housing drove most of the annual and monthly increases.

Even when the cost of energy and food is taken out of the equation, prices in May were up 2.2% compared with a year ago, almost enough to eat up any gains workers made in their paychecks. This occurred as a result of employee wages not growing as much as they did in previous expansions. At the beginning of this month, the Bureau of Labor Statistics reported that wages were up only 2.7% in May compared with a year ago.

That is less than the annual rate of inflation, at least for the moment. If inflation takes away even more spending power as the months pass, consumers might be more reluctant to spend on retail items.

There is a recent precedent for that dynamic. During a short uptick in inflation in early 2017, consumers did indeed cut back on their spending, though that bit of inflation soon calmed down and retail spending chugged along.

Some observers are optimistic that the strong economy will continue to support retail spending, even with higher inflation.

“We have seen ongoing momentum over the last several months and believe sales growth should remain healthy and consistent with our 2018 outlook," National Retail Federation Chief Economist Jack Kleinhenz said in a statement.

"Nonetheless, inflation and rising oil prices are complicating the picture. And new tariffs or a trade war would certainly be negatives that would increase prices and reduce both consumer purchasing power and consumer confidence.”

It is also possible that more vigorous inflation might, at least in the short run, inspire consumers to spend more. "[Inflation] might actually catalyze the consumer to actually spend sooner rather than waiting with the anticipation that it will be cheaper," J.P. Morgan Private Bank's Jack Caffrey told CNBC.

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