Retail sales, inflation and the Fed

ARI SHAPIRO, HOST:

Americans are spending more but getting less. Retail sales figures out today show people spent more money than expected last month, but those dollars didn't stretch as far because prices are climbing even faster. NPR's Scott Horsley joins us to talk through what the latest indicators are telling us about the economy. Hey, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you, Ari.

SHAPIRO: OK, so retail spending overall rose 1% between May and June. Where did that extra money go?

HORSLEY: Well, some of it went to gas stations, as you might expect since gasoline prices hit a record high last month - above $5 a gallon. But it looks like people actually bought fewer gallons of gas when the price took off. Spending at grocery stores was also up but not as much as grocery inflation. So people shelled out more money at the cash register but left with less food in their shopping carts. Jonathan Silver is CEO of Affinity Solutions, which tracks consumer spending using credit and debit card data. He says inflation is making shoppers more careful about what they buy.

JONATHAN SILVER: Consumers are definitely showing more price consciousness as a result of inflation, focusing on needs versus wants and moving or shifting spend to lower-cost versions of the same products.

HORSLEY: Economists keep a close eye on this because consumer spending is the No. 1 driver of the U.S. economy. Silver says so far, spending has not taken much of a hit, and he's certainly not seeing signs of a recession around the corner. But he is on the lookout for any drop in consumer demand.

SHAPIRO: Is there a disconnect between that spending and how people say they feel about the economy right now?

HORSLEY: Yeah. If you just looked at survey data about people's feelings, you'd think we were already in a recession because people say they're feeling pretty gloomy about the way the economy's going. But the spending numbers tell a different story. Christopher Waller, who's a member of the Federal Reserve's Board of Governors, notes the job market is still very strong. People do have money in their pockets and in their bank accounts. But there's also this wet blanket of inflation, so their money doesn't stretch as far as it used to.

CHRISTOPHER WALLER: Jobs are plentiful. You want a job; you can get one. But inflation is just destroying people's attitudes. You go to the gas pump, and you watch your bank account empty into your car. It's no fun.

HORSLEY: Now, Waller says he and his Fed colleagues understand the hardship that inflation is causing for people. That's why they're determined to get prices under control. He does think there's still an opportunity for the Fed to engineer a so-called soft landing - that is, bring down inflation - without tipping the economy into a recession.

SHAPIRO: How hard do you think the Fed is going to pump the brakes?

HORSLEY: Well, it's a good question. And after we got that ugly inflation report on Wednesday showing prices had soared more than 9% over the last year, a lot of people thought the Fed was really going to bring out the big guns and raise interest rates by a full percentage point at its July meeting. That would be the biggest rate hike since the late 1980s. Over the last couple of days, though, as more data has come out and as we've heard from some Fed officials like Waller, that expectation has been dialed back a bit. The market is now betting on a slightly smaller rate hike of three quarters of a percent, similar to what the Federal Reserve did at its June meeting. That's still a large increase but not a full percentage point. And the stock market seems to appreciate this more cautious approach. The Dow Jones Industrial Average jumped nearly 660 points today, or a little over 2%.

SHAPIRO: NPR's Scott Horsley. Thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.