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Retail Sales Are Expected to Jump in January. Why That’s Bad News for the Fed.

Economists are expecting consumer spending picked up in January following a weak holiday season.

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Eric Lee/Bloomberg

Economists have high hopes for January retail sales, released later this morning.

Retail sales are expected to jump by 1.6% in January, according to FactSet, signaling that consumer demand remains resilient despite a challenging macroeconomic environment.

A rebound in sales would be a welcome shift for retailers following two months of consecutive declines and a softer-than-expected holiday season. In December, retail sales fell by 1.1%, tailing a 1% decline in November.

The rebound seems counterintuitive, given that half of Americans say they are worse off than a year ago, per a recent Gallup poll. Inflation has played a big role in dampening consumer optimism. Even though prices have moderated from their peak last summer and have declined for seven straight months, inflation remains high with the consumer price index climbing at a 6.4% annual pace in January.

For Citi economist Gisela Hoxha, January’s bump could come down to the way the data is seasonally adjusted, a statistical technique that tries to remove the influences of seasonal patterns.

“In our view, seasonal factors not picking up shifts in consumption patterns was in part why December retail sales were so weak and partly why we expect largely broad-based strength in January retail sales,” Hoxha wrote in a note.

BofA economist Aditya Bhave agrees, adding that seasonal adjustments are still largely based on pre-Covid spending patterns. Since the pandemic, people are shopping sooner and spreading out their spending across more months of the year, leading to a “statistical distortion” that gives January sales a boost.

But that’s not the only reason undergirding the jump, Bhave wrote. Personal incomes have been notching consistent gains over the past few months, buoyed by a healthy labor market and cost-of-living adjustments to Social Security benefits, he wrote in a research note on Monday. Indeed, the U.S. added 517,000 jobs in January, while the unemployment rate fell to its lowest level since 1969.

It’s also possible that consumers were waiting for postholiday clearance sales, Bhave added. Based on BofA card data, some of the weakest categories in December—furniture, clothing, and department stores—improved in January, he wrote.

That would be good news for retailers as they prepare to report quarterly results starting next week. Many large retailers, including
) and
) finish their fiscal year in January to capture all holiday season sales.

For the Federal Reserve, however, a strong sales report is the last thing it needs.

For the past year, the central bank has tried to cool consumer demand by raising interest rates in a bid to bring prices down. The plan seemed to be working by the end of 2022—job growth slowed while inflation began to tick down. As a result, the Fed started to slow the pace at which it increases interest rates, bringing them up by a quarter of a percentage point at its latest meeting.

But as Fed officials have repeatedly said, the central bank’s rate increase decisions will be guided by data. Recent indicators—including a mixed CPI and stronger-than-expected jobs report—point to an economy that is still too hot for the Fed’s liking.

“The January CPI report adds to doubts that inflation is truly on a path back to the Federal Reserve’s target,” wrote Curt Long, chief economist at the National Association of Federally-Insured Credit Unions, in emailed comments. “In conjunction with the blowout jobs report in January, this further augments recent assertions from the FOMC for sustained tightening over the coming spring, increasing the potential of an acceleration in the size of individual hikes as well as the terminal rate.”

Factor in impressive retail sales data, and the Fed may indeed decide it has more work to do.

Write to Sabrina Escobar at


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