Higher Inflation Expectations Have Begun to Influence Buying Decisions

Consumer price expectations have become unanchored, trending upward, and people's inflation expectations are influencing their purchasing behaviors. In July and August, nominal retail sales increased by 1.2% over the two months, with both monthly gains surpassing analysts' estimates. However, the key insight from the stronger-than-expected retail sales data is that over 80% of the increase occurred at store establishments affected by higher inflation (tariffs). Sales in motor vehicles (due to tariffs and the end of EV credits), furniture and appliances, clothing, and general merchandise stores rose by 1.9% over two months, while sales elsewhere increased by just 0.5%. Policymakers monitor surveys of consumer expectations to determine if people are incorporating higher inflation expectations into their spending habits. The recent data suggest that they are. Adopting a more relaxed monetary policy when inflation expectations are rising and consumers are spending in anticipation makes it more affordable and prolongs the inflation cycle.