Economic Report: Are Americans buying more stuff? Or just paying higher prices?

Read: U.S. retail sales jump 1.7%, but high inflation plays role

Good news, to be sure. Higher retail spending is typically a sign of a healthy economy. People spend more when they feel good and cut back when they don’t.

Yet the biggest increase in inflation in 31 years has muddied the picture. Consumers aren’t simply buying more stuff, they are paying higher prices, too.

Read: High inflation is eating up the budgets of American households

After factoring in high inflation, most economists still viewed the increase in retail sales last month as a good omen.

“It was still a strong number even when you account for higher prices,” said chief economist Richard Moody of Regions Financial in Birmingham, Ala. “Those were stronger gains than you would typically see in the month of October.”

Now the hard part. Figuring out just how much inflation, well, inflated retail sales last month is not so easy to determine. Let’s drill down and look at the numbers.

The simple short-hand approach is to subtract the 0.9% increase in consumer prices last month from the 1.7% advance in retail sales.

Voila. Sales rose a solid 0.8%. That’s much better than the average 0.3% increase in retail sales each month from 2012 to 2019. The pandemic broke out a few months later.

But wait. Inflation in goods prices actually rose almost as much in October as retail sales, virtually wiping out any increase. Seen that way the retail report was weak and not a good sign for the economy.

Neither back-of-the-envelope calculation is the best way to truly understand what is going on.

What do Wall Street
DJIA,
-0.47%
economists like Moody’s do? It’s complicated.

Moody’s subtracts the rate of goods inflation minus food and energy from the increase in sales of a so-called control group.

The control group includes all retail receipts except sales at auto dealers, groceries, restaurants, gas stations and home centers such as Home Depot
HD,
+0.78%
and Lowe’s
LOW,
+2.52%.

That puts the focus on the stores where Americans spend most of their retail dollars — internet retailers, department stores and big-box chains that sell electronics, appliances and so forth.

Sales in all those categories surged in October well above the rate of inflation. Internet sales jumped 4%, for example.

Using this approach, adjusted retail sales rose 1.6% in October and core goods inflation increased 1%.

The result: U.S. retail sales in October rose a healthy 0.6%, more or less. That’s still twice the pre-pandemic average.

 “The positives for consumer spending are much larger than the negatives,” said chief economist Gus Faucher of PNC Financial Services.

He points out that Americans still have plenty of savings built up during the pandemic. Wages are also rising and people feel more secure in their jobs with layoffs at a record low.

Read: Mystery of missing millions the only blemish on a strong U.S. jobs report

He predicts retail sales in the holiday season will climb 15% from depressed levels in 2020 when Covid was still raging. “Some of that increase will come from higher prices, but most of it will be from higher sales volumes,” he said.

A new survey of consumer appears to back him up:

See: Americans are optimistic about their finances and plan to splurge this holiday season