US retail sales rose sharply in January, the latest in a string of hotter-than-expected economic data that could force the Federal Reserve to tighten longer to slow the American economy.
Retail sales, which include spending on groceries and fuel, rose 3 percent last month from December levels, the Census Bureau said on Wednesday. It was one of the largest monthly increases in the past 20 years, beating economists’ expectations of 1.8 percent.
The data, which showed signs that American consumers have not cut back on consumer spending despite high inflation, came a day after the Labor Department released inflation figures that showed price pressures were not easing as much as they were late last year.
It also follows a Labor Department report on nonfarm payrolls that showed new hires nearly doubled in January, with the US economy adding more than half a million jobs that month – up from 223,000 in December.
Fed Chairman Jay Powell has repeatedly warned that the central bank must keep interest rates high to fight inflation: the consumer price index rose 6.4 percent in January from a year earlier.
But in recent months, financial markets have signaled that investors believe the Fed will be able to take its foot off the brakes by the end of 2023 on the back of rapidly weakening price data.
However, the flurry of strong data in February has prompted a reversal in market sentiment. On Wednesday morning, the interest-rate-sensitive two-year Treasury yield rose to its highest level since early November, but then reversed some of that move to remain unchanged at 4.62 percent in afternoon trade.
The US dollar index, which measures the greenback against a basket of six currencies, rose to its highest level since early January. US stocks were positive overall, with the blue-chip S&P 500 up 0.1 percent and the tech-heavy Nasdaq Composite up 0.7 percent.
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Wednesday’s retail sales report showed that higher borrowing costs, spurred by the Fed’s aggressive year-long campaign to raise interest rates, and persistent inflation have yet to stop Americans from shopping.
However, according to Oxford Economics’ Oren Klachkin, it was “unlikely” for sales to stage a sustained recovery. While it may take some time for spending to ease, slowing job and wage growth and “stubborn” inflation would eventually dampen consumer spending.
“For the Fed, this data supports its view that more rate hikes are needed to cool the economy and bring inflation down to 2 percent,” he said.
The January reading pointed to a strong rebound from the holiday month, which had seen the biggest monthly fall in retail sales since December 2021. The figures are not adjusted for inflation.
Spending at gas stations was flat since December but was still 5.7 percent higher than a year ago, even as prices at the pump have eased.
The so-called retail control panel, which excludes building materials, auto parts and gas station sales, rose 1.7 percent, beating economists’ expectations with a 0.8 percent gain.
James Knightley, chief international economist at ING, said the rise in sales in January was driven by warmer weather, which encouraged consumers to leave their homes and spend.
“We have to be a little cautious that with weather patterns returning to more seasonal norms in February we could see a sharp correction next month – particularly if household finances remain under pressure from high inflation and slowing wage growth,” he said .
Additional reporting by Kate Duguid in New York