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U.S. retail sales bounced back at the start of the year, a sign of consumers’ faith in the economy even in the face of inflationary pressures and the low-hum of recession fears: People are shopping. People are going out to eat. People are buying cars and trucks.

Retail sales rose 3% from December 2022, according to the January advance retail sales report, released Wednesday by the U.S. Census Bureau, defying economist expectations for a post-holiday dip and marking an increase after two months of declines in the tail-end of 2022. The boost to sales and consumer spending could give the Fed reason to worry as it looks to curtail spending and pull the economy away from inflationary pressures.

“We saw outsize gains, multiple gains across a variety of categories,” said Rubeela Farooqi, chief economist at High Frequency Economics. “A very strong start to the quarter, no denying it.” 

The seasonally-adjusted numbers renew optimism in the economy following news of a booming job market — the U.S. added over 500,000 jobs in January — and steady wage growth putting more money in people’s pockets. Workers are now making nearly $2 more an hour than they were in January 2022.  

However, these numbers are not adjusted for inflation, which means that at least part of the growth could reflect the increase in prices, not sales. Consumers are still paying high prices for goods and services, though the rate at which prices are going up has cooled slightly. This month’s Consumer Price Index rose 6.34% percent from January 2022 — keeping pace with the increase in retail sales by 6.38% over the same period. 

The increase in spending in January cut across all major categories. Much of the growth was driven by spending in the auto market and food-and-drink establishments, which reported increases of 5.9%  and 7.2% respectively. Department stores reported the biggest change: an increase of 17.4% from December, likely accounting for the purchases that would have been made during the holiday month if not for the ice storm that impacted travel, flights and holiday spending in the last weeks of December. Retailers also stocked up on inventory heading into the holiday season, per Christopher Low, chief economist at FHN Financials.

“Retailers did talk up more that they were more aggressive about inventory building this year than last year,” Low said. “ That led to some pretty decent discounts, which it looks like were quite effective in bringing people into the stores.” 

Another factor that may have contributed to higher spending was the increase in Social Security checks to older Americans who drove a lot of the spending, said Michael Gapen, chief economist at the Bank of America. 

Some holiday spending was pulled back to October 2022, contributing to decreases across retail sales in November and December, months that saw reduced spending from pandemic highs, as news from the Fed’s tightening interest rates made dismal headlines and solidified fears of a possible recession. Though wage growth was strong, consumers were pocketing their extra dollars and saving at a rate of 3.4% in December, up from a rate of 2.9% in November. 

The Fed increased interest rates by another quarter percentage point to 4.5% earlier this month with the promise of more rate increases to come, signaling that its fight against inflationary prices is not yet over and might not be for much of this year. Prices rose 6.34% from January 2022, nowhere close to the Fed’s target inflation rate of 2%. 

Economists warned not to read too much into the one-month increase in sales as they begin separating the “noise from the signals,” anticipating that the Fed, faced with a strong labor market and still-high inflation, will once again look to stop the economy from boiling over. Though economists agree these are significant numbers — a $20 billion jump in sales from December 2022 is nothing to sneeze at— there is a consensus that the momentum could partly be explained by the economy playing catch-up from the dips of November and December 2022. Gapen said he expects a softer labor market and likely recession as the year goes on. 

“I still think the economy is slowing down, but only slowly,” Gapen said. “This type of retail sales data, when you smooth through some of the volatility, is consistent with the economy flowing, but only begrudgingly.”