Consumer confidence is rattled by inflation — but Americans are still shopping

Americans keep spending even as prices are spiking.

That’s good news for retailers heading into the holiday season, as well as for the economy as a whole, which runs on consumer spending.

Adjusted for seasonal swings, US retail sales rose 1.7% in October compared to the previous month, the Census Bureau reported Tuesday. That was more than economists expected, more than the September increase, and the biggest jump since March, when government stimulus fueled consumer spending.

Excluding cars, car parts and spending at gas stations, retail sales still increased 1.4% last month.

“We certainly see a consumer that has a strong balance sheet. We see spending levels higher. We see demand is higher,” said Walmart (WMT) US CEO John Furner said during the company’s earnings call Tuesday.

But the long period of high demand has also stretched already strained supply chains, resulting in out-of-stock items and higher prices, added Walmart CEO Doug McMillon.

And even though people have money to spend, rising inflation is weighing on sentiment: Last week, the University of Michigan’s consumer sentiment index, which gave an early look at how American consumers were feeling in November, fell to its lowest in a decade.

This trend is also visible in the buoyant October retail sales data, said economists Tim Quinlan and Shannon Seery from Wells Fargo (WFC).

“If price gains outstrip spending increases, that implies a volume decline. For example, gasoline sales rose 3.9%, though the fact that motor fuel prices were up 6.1% suggests that consumers may be starting to combine trips or otherwise limit their driving,” they said in a note to clients, comparing Tuesday’s retail sales data to inflation data.

Similarly, spending at restaurants was flat last month but consumer price inflation data tells us that prices for eating out at restaurants rose 0.8%.

“Consumers are still going out to eat, but perhaps some diners are moving down the price curve from upscale full-service dining experiences toward more humble fast-casual options,” said Quinlan and Seery.