Consumers feel better as inflation slows

Is anybody else’s wallet sick and tired of inflation, I know for a fact mine is. While inflation has made significant improvements from its peak in 2022, lingering inflation and elevated interest rates remain a concern for most American consumers, evident through their impact on retail sales and consumer sentiment in 2024.

While it will take time for inflation to reach the Federal Reserve’s 2.0% target and interest rates to come down, there is some good news to share – consumers are more optimistic today than they were a year ago.

Retail sales grew 3.0% since last year

According to the United States Census Bureau, advance monthly retail sales totaled $705.2 billion in April, which were unchanged month-over-month from March. This follows two consecutive months of rises in retail sales after a bumpy start to the year in January, with retail sales dropping more than expected after a busy holiday season.

While most sectors saw monthly declines in sales, most sectors were up year-over-year in April, with total retail sales up 3.0% from April 2023. Nonstore retailers, a category that includes much of e-commerce sales, were up 7.5% year-over-year, restaurant and bars were up 5.5% year-over-year, and apparel and accessories were up 2.7% year-over-year.

E-commerce now accounts for 15.9% of retail sales

E-commerce saw explosive growth in Q2 2020 as public health concerns and stay-at-home-orders prevented consumers from shopping in-store, resulting in e-commerce sales reaching over $200 billion, which accounted for 16.4% of total retail sales.

As the nation reopened a year later, retail e-commerce growth tapered down as consumers adjusted to their new normal and resumed in-store shopping. By the end of 2022, e-commerce sales totaled nearly $260 billion, which accounted for 14.6% of total retail sales - a 1.8 percentage point decrease from Q2 2020 but remained above pre-pandemic levels. The pandemic led to a shift in consumer shopping behavior, with e-commerce cementing itself as another mode of shopping for those may not have time to shop in-store or would like to find deals online.

Retail e-commerce growth steadily continues in 2024. E-commerce sales was estimated at $289.2 billion in Q1 2024, a 2.1% increase from Q4 2023 and 8.6% from Q1 2023, which accounted for 15.9% of total retail sales – just 0.5 percentage points below its peak in 2020.

Consumers feel better than they did a year ago

According to the University of Michigan’s consumer sentiment index, which reflects how optimistic a consumer feels about their financial situation and the overall economy, consumers feel less optimistic as inflation rises. When inflation reached its peak at 9.0% in June 2022, the consumer sentiment index registered its lowest reading of 50.

Thanks to gradual interest rate hikes, inflation cooled and consumers became more optimistic, with the consumer sentiment index reading at just under 70 by the end of 2023, alongside inflation rising at an annual rate of 3.3% in December 2023.

Following little change in consumer sentiment for most of the first half of 2024, consumer sentiment decreased 10.5% month-over-month in May from April, registering at 69.1 – its lowest reading since December 2023. Despite consumer sentiment falling back in May, the current reading reflects that consumers are still more optimistic about their financial wellbeing and the economy today than they were in the past two years. Compared to May 2023, consumer sentiment is up 17.1% and when compared to its lowest reading in June 2022, it is up 38.2%.

As consumers remain optimistic amidst the ongoing inflation situation, we can expect to see outsized growth in retail sales in categories such as restaurant and bars, with the F&B category continuing to open new stores at a brisk pace as consumers continue to dine out.