US retail sales slid from record highs in May amid waning reopening boost

• US retail sales fell more than expected in May as Americans settled into a new normal.
• Spending dropped 1.3% through the month. Economists expected a decline of 0.7%.
• The reading marks the largest decline since February, but sales still sit 28% higher from May 2020.

Spending at US retailers slumped for the first time since February last month as more economic restrictions were reversed and Americans settled into a new sense of normal.

US retail sales fell 1.3% in May, the Census Bureau said Tuesday. Economists surveyed by Bloomberg held a median estimate for a 0.7% decline. The decline places monthly sales at $620 billion and just below the record-high seen in April.

The April sales data was revised higher to a 0.9% jump from an initially unchanged reading.

While sales sit lower than the previous total, they're still up 28% year-over-year and 18% from pre-pandemic highs. The May 2020 sales report showed spending surge as stimulus included in the $2.2 trillion CARES Act revived economic activity. It also marked the largest one-month sales jump in data going back to 1992.

Spending in the clothing and accessories industry was up 200% year-over-year, while sales at food services and bars sat 71% higher from the year-ago period.

Sliding sales and rising inflation

The May dip in retail spending suggests that, after reopening unleashed pent-up demand, consumers are pulling back. Retail sales were among the few indicators to stage a V-shaped rebound early in the pandemic and quickly exceed pre-crisis levels. Now, as stimulus dries up and the final lockdown measures are unwound, spending is set to moderate.

Such a trend would be good news for those fearing runaway inflation. The wave of consumer demand and various bottlenecks throughout the economy led price growth to accelerate sharply through the spring. The Consumer Price Index rose 0.6% in May, beating the median estimate for a 0.4% jump.

The gauge also rose 5% year-over-year, marking the fastest one-year inflation rate since 2008. Though the reading is somewhat skewed by falling prices in May 2020, it still signals inflation firmed up as massive demand ran up against widespread supply shortages. A steady dip in retail sales could hint at softer demand through the summer.

But whereas fiscal stimulus like direct payments and enhanced unemployment insurance will soon lapse, monetary policy remains highly accommodative. The Federal Reserve has indicated it is willing to run the economy hot to foster a faster and more inclusive recovery for the labor market. The central bank continues to hold interest rates near zero and buy at least $120 billion in assets each month to maintain its policy stance.

The Federal Open Market Committee will give the next hint at when the Fed will retract its support on Wednesday, following its two-day meeting. Policymakers are expected to hold interest rates and purchase pace steady but note the committee has begun talks on when to taper its asset-buying. Fed Chair Jerome Powell will likely acknowledge that, while inflation has exceeded estimates, the elevated rate will prove temporary as supply-chain strains are solved.