US retail sales jump in latest sign Federal Reserve may need to keep rates high

US retail sales increased sharply in January, the latest in a series of hotter than expected economic data that may force the Federal Reserve to keep tightening monetary policy for longer to slow the American economy.

Retail sales, which include spending on food and fuel, rose 3 per cent last month over December’s levels, the Census Bureau said on Wednesday. It was one of the biggest monthly increases of the past 20 years and surpassed economists’ expectations for a 1.8 per cent increase.

The data, which included signs that American consumers have not pulled back spending on discretionary items despite high inflation, came a day after the labour department published inflation figures that showed price pressures were not easing as much as they were late last year.

It also follows a labour department report on non-farm payrolls, which showed that hiring nearly doubled in January, with the US economy adding more than a half million jobs in the month — up from 223,000 in December.

Fed chair Jay Powell has repeatedly warned that the central bank will need to keep rates high to fight off inflation: the consumer price index rose at a rate of 6.4 per cent in January compared with a year ago.

But in recent months financial markets have signalled that investors believe the Fed will be able to take its foot off the brake by the end of 2023 because of quickly moderating price data.

However, February’s spate of strong data has triggered a reversal in market sentiment. On Wednesday morning, the rate-sensitive two-year Treasury yield rose to its highest level since early November, though subsequently reversed some of that move and was flat at 4.63 per cent in late afternoon trading.

The US dollar index, which measures the greenback against a basket of six currencies, rose to its highest level since early January. US stocks were positive overall, with the blue-chip S&P 500 closing 0.3 per cent higher and the tech-heavy Nasdaq Composite adding 0.9 per cent.

Wednesday’s retail sales report showed that higher borrowing costs, driven up by the Fed’s aggressive year-long campaign to increase interest rates, and persistent inflation have yet to put Americans off shopping.

But there was “unlikely” to be a sustained recovery in sales, according to Oren Klachkin at Oxford Economics. While it might take time for spending to soften, cooling job and wage growth and “stubborn” inflation would ultimately weigh down consumers’ willingness to spend.

“For the Fed, these data are supportive of their view that additional rate hikes are needed to cool the economy and bring the inflation down to 2 per cent,” he said.

January’s reading indicated a strong recovery from the holiday month, which had reported the biggest monthly decrease in retail sales since December 2021. The figures are not adjusted for inflation.

Spending at petrol stations remained flat from December but was still up 5.7 per cent from a year ago even as prices at the pump have moderated.

The so-called retail control group, which excludes building materials, motor vehicle parts and petrol station sales, increased 1.7 per cent, topping economists’ expectations for a 0.8 per cent increase.

James Knightley, chief international economist at ING, said January’s increase in sales was spurred along by warmer weather that encouraged consumers to leave their homes and spend.

“We have to be a little cautious that with weather patterns returning to more seasonal norms in February we could get a significant correction next month — especially with household finances remaining under pressure from high inflation and slowing wage growth.”

Additional reporting by Kate Duguid in New York