Retail Sales Up 1.2% in August, Fueling Fears of a 3rd Rate Hike

Sales at U.S. retail stores surged faster than expected in August, the government said Tuesday in a report that rekindled fears of a Federal Reserve interest rate rise.

Americans’ love of shopping for everything from cars to clothes helped the total value of retail sales rise 1.2% in August to a seasonally adjusted $252.39 billion.

The Commerce Department also revised its figure for July to a 1% increase, from the previously reported 0.7%. The volume of sales in August was a huge 10.6% higher than in the same month last year.

August’s robust gains, helped by a strong back-to-school season, outstripped the 0.8% rise forecast by economists, according to a Reuters poll.

A separate report underscored the strength of U.S. consumer demand. The department said the country’s current account deficit rose to a record $80.67 billion in the April-June quarter, up from $68.65 billion in the first quarter as imports grew faster than exports.

Economists had expected a strong retail sales report but most were taken aback by the sheer strength of consumer spending, which many had hoped would be less robust as the economy steams into its ninth unbroken year of expansion.

“Gains of [this] magnitude are usually associated with the beginnings of an economic expansion, not one closing in on its ninth anniversary,” said Mark Vitner, economist at First Union.

Consumer spending is a major component of the economy’s gross domestic product and has been a driving force behind the current expansion. At the fore of economists’ concerns is the apparent imbalance between the relentless pace of consumer spending and muted signs of inflation.

With foreign economies on the road to recovery and Americans buying more and more imports, as evidenced in the trade report, many fear prices may begin to creep higher, signaling an uptick in inflation.

The retail sales report suggested that recent interest rate hikes by the Federal Reserve have yet to dampen consumer spending. August’s gains were the strongest since a 1.7% rise in February and marked the eleventh increase in retail sales in the last 13 months. Even excluding automobiles, August retail sales rose 0.7%, much stronger than the 0.4% gain expected by economists.

The retail sales figures were so robust that some economists said they could be more important than today’s consumer price index report.

“There is a case to be made that these retail sales figures eclipse the CPI numbers in importance this week. The consumer inflation numbers will only tell us what happened last month, while the consumer spending bears on future inflation,” said Ken Maryland, chief economist at KeyCorp. “So even if August consumer inflation was benign, the Fed may need to push a little harder.”

Fed Chairman Alan Greenspan has repeatedly stated he would act quickly to head off potential inflationary pressures.

Economists said the report would add pressure on the Fed to raise interest rates for the third time this year when its Federal Open Market Committee meets Oct. 5.

With last week’s producer price index tame and gains in average hourly earnings also muted, most economists claim today’s CPI data will be key in helping the Fed decide whether interest rates should be raised once more to head off potential inflationary pressures.

“Strong retail sales by themselves do not make for another Fed rate hike,” said Joel Naroff of Naroff Economic Advisors.