Retail sales fell 1.1% in December, the biggest monthly decline in 2022

Americans cut spending in December for the second month in a row, highlighting how inflation and rising credit card costs slowed down consumer activity during the crucial holiday shopping season.

Retail sales fell a worse-than-expected 1.1% in December after a revised 1% fall in November, the Commerce Department said on Wednesday. Retail sales rose 1.3% in October, boosted by early holiday shopping.

Car sales fell as rising car loan interest rates capped demand. This, plus falling gas prices, helped lower overall retail sales. The December figure marked the biggest monthly decline in 2022.

The Fed raised its key interest rate in December for the seventh time in 2022 for precisely this reason, in an attempt to bring down spending and inflation.

But even excluding auto and gasoline sales, retail sales fell 0.7%. Retail sales are not adjusted for inflation, unlike many other government reports. Higher prices increase sales and lower prices decrease sales. December purchases also suffered because shoppers started buying gifts in October.

However, “cracks are appearing in the resilience that consumers have shown in 2022 as higher prices, higher interest rates and macro uncertainty finally take their toll,” Moody’s vice president Mickey Chadha said in the report.

Chadha noted that low unemployment and rising wages have so far supported consumer spending, but in the coming months, Moody’s notes that consumers are becoming more “selective” in their spending and delaying purchases, which is holding back retail sales in the first half of the year.

Sales dropped in key gift categories towards the end of the holiday season. Sales in electronics and home appliances stores fell 1.1%; furniture and home goods stores fell 2.5%. And in department stores, the fall was 6.6%. Sales in online stores fell by 1.1%. Restaurants have also seen a fall.

Spending has remained resilient despite the surge in inflation that began almost 19 months ago, but the ability of Americans to continue spending has diminished.

Secure employment, pay increases, and savings boosted by government bailouts during the pandemic have allowed most Americans to keep up with rising prices. However, that government aid ended long ago, and since then, some Americans have plunged into savings accounts. Credit card defaults are on the rise, and some households are slow to adjust their spending to the new reality.

However, the labor market is still the mainstay of the economy, and wages continue to rise, creating conflict for the Fed, which needs to cut spending and hiring to control inflation.

It seems that inflation, at least for now, is receding. Inflation fell to 6.5% in December, declining for the sixth straight month.

On a monthly basis, prices actually fell 0.1% from November to December, the first such drop since May 2020.

However, goods are still much more expensive than last year, and this has become apparent to many large retailers. Stores have had to make big discounts this season to get shoppers to buy.

This month, Macy’s eased its quarterly sales forecast after customers spent less than expected during the lull between the Thanksgiving weekend and the last days before Christmas. And high-end yoga pants maker Lululemon warned that fiscal fourth profit margins will be cut as shoppers focus on discounts.

Another problem retailers face is that shoppers are spending more on travel and other entertainment than on products.

Bloomingdale Chairman and CEO Tony Spring noted at a retail event earlier this week that the chain is giving away travel merchandise to boost spending. He also decorates his mannequins to appeal to shoppers who are returning to stores after focusing on online spending in the midst of the pandemic.

The retail report, released on Wednesday, covers only about a third of total consumer spending and excludes services such as haircuts, hotel stays and plane tickets.