The situation: There have been a lot of positive indicators for retailers to feel good about lately.
US consumers keep spending. The personal consumption expenditures index—a broad measure of consumer spending on goods and services—rose 0.4% month over month (MoM) in August following a 0.2% MoM decline in July, per the US Commerce Department. Spending on services rose 0.8% MoM, while falling gas prices pushed goods spending lower for the second month in a row.
And they’re feeling better about the economy. Even though the Federal Reserve’s preferred measure for core inflation came in hotter than expected—rising 0.6% MoM after being flat in July—post-tax personal income edged up 0.4% MoM, a tick above the headline 0.3% inflation. That has consumers cautiously more optimistic about their finances: Both the University of Michigan’s consumer sentiment index and the Conference Board’s consumer confidence index ticked up in September. And Gallup’s economic confidence index rose modestly in September after a relatively large improvement in August.
But even as strong consumer demand and better wages buoy sentiment, there are signs of trouble ahead.
The Fed isn’t happy: Inflation’s persistence will likely keep the Fed firmly in rate-hike mode to cool demand.
Other warning signs: There are other reasons for retailers to be concerned.
The big takeaway: In normal times, retailers could feel good about their holiday sales prospects given the positive consumer spending momentum, wage increases, and an uptick in consumer confidence ahead of the holidays. But in this inflationary environment, many of those signs may drive the Fed to keep raising interest rates aggressively, which will hinder growth.
This article originally appeared in Insider Intelligence's Retail & Ecommerce Briefing—a daily recap of top stories reshaping the retail industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.