Retail Sales Just Saw Their Biggest Gain in Almost 2 Years

What happened

U.S. retail sales rose 3% from December to January, according to the Commerce Department as reported by CNN. That increase represents the largest gain in nearly two years. It also blew past economists' expectations of a 1.8% month-to-month lift.

So what

Retail sales declined 1.1% on a monthly basis in December. But in January, retail spending rebounded, making January's increase the largest boost since March of 2021 -- a strong month for retail, thanks to the stimulus checks that hit Americans bank accounts during that time.

The increases didn't discriminate, either. Some of the largest increases were seen across the board. Department store sales jumped 17.5%, food services and drinking places rose 7.2%, and auto dealers went up 6.4%, according to the Commerce Department report.

"The increase in retail sales, combined with the very strong January jobs report, reduce concerns that recession is imminent," Gus Faucher, PNC Financial Services Group's chief economist, wrote on Wednesday. "Although some of the increase came from higher prices, more of it was from higher volumes."

Now what

The fact that retail sales were up in January is a sign of a healthy economy. And that should help quash some of the near-term recession fears consumers may be grappling with.

At the same time, January's blowout retail sales numbers only compound the persistent problem of inflation. And on the heels of this recent uptick, consumers could be in line for a series of aggressive interest rate hikes on the part of the Federal Reserve.

The Fed doesn't set consumer borrowing rates. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But when the Fed hikes up interest rates, consumer interest rates tend to follow suit, which means borrowers could be looking at higher interest rates on everything from auto loans to credit card balances in 2023. 

Worse yet, if the Fed gets too aggressive in the course of raising interest rates, it might fuel a major pullback in consumer spending. The whole purpose of rate hikes is to encourage a softening on the spending front that allows the supply of goods and services to catch up to consumer demand. But if consumer spending declines substantially, we could end up back in a place where a near-term recession becomes a major concern. So we'll need to keep an eye on retail sales data, as well as general inflation data, to know whether to gear up for a downturn or not.