Strong US retail sales keeps inflation risks to the upside
For the third straight month, retail sales came in above consensus and our expectations in October, with headline sales rising 1.7% m/m, and ex-autos/gasoline rising 1.4% (consensus: 0.7%).
We estimate retail sales are now 13.4% above the pre-pandemic trend, the biggest gap with trend since June (see chart below). Strength was observed across categories, but was particularly evident in online sales (+4% m/m), home improvement (+2.8%), and autos (+1.8%). Compared to the pre-pandemic level, online sales are now around 40% higher, while home improvement and autos are around 20% higher.
Given that retail sales are reported on a nominal basis, the elevated inflation readings of late likely explain a significant part of the recent strength. However, monthly consumption data from the national accounts (which corrects for price rises) also points to goods consumption remaining well above trend, with a normalisation back to pre-pandemic consumption patterns taking much longer than we had anticipated.
With goods consumption remaining elevated, and supply side bottlenecks persisting, the risks to inflation remain tilted to the upside, both over the coming months but also in the medium term. Given this, we are currently reviewing our base case for the Fed’s policy rate path, and will communicate on this in the coming days.