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US retailers are facing their first real-terms fall in revenues since the global financial crisis this holiday season, even as resilient consumer spending poses challenges to officials seeking to bring inflation under control.

Black Friday, the informal start of the peak shopping season, falls this week at a turning point for consumer spending, as the highest inflation since the early 1980s erodes shoppers’ purchasing power. Most retailers are cautiously optimistic about the coming weeks, however, as the pandemic health fears and supply chain shocks that affected holiday spending in 2020 and 2021 recede.

Retailers should report headline sales growth of 4.5 per cent year on year this holiday season, according to S&P Global Market Intelligence. But after stripping out the inflation that has caused retailers to increase prices to offset their own higher costs, that would equate to a real-terms fall of 1.2 per cent.

“Demand has held up surprisingly well given how much prices have risen,” said Michael Zdinak, who leads S&P’s US consumer markets service. He added, however, that the exceptional combination of high inflation with historically low unemployment made consumers’ plans unusually hard to forecast. “There’s not another year like it,” he said.

Inflation was leading consumers to seek out promotional offers much more than usual, noted Stephanie Cegielski, vice-president of research at ICSC, a shopping centre industry group, but they still intended to spend. “They’ll be buying as much as last year, just at higher prices.” 

Many will turn to credit card borrowing to do so, after depleting their savings from pandemic stimulus programmes. New York Fed economists this week reported that credit card balances had jumped by 15 per cent a year in the third quarter, their steepest year-on-year increase in more than 20 years.

Credit card borrowing had been “really ramping over the last quarter”, said Betsy Graseck, a Morgan Stanley managing director covering US large-cap banks, with delinquencies also accelerating at the fastest pace since the 2008 financial crisis, a trend which would typically prefigure more loan losses to come.

Earnings announcements from large chains offered a mixed picture of the outlook this week, with Target warning that spending patterns had changed “dramatically” at the end of the third quarter, with shoppers becoming more price sensitive.

Walmart raised its outlook, however, while Foot Locker, the shoe retailer, boasted of “strong momentum”, leading analysts to conclude that differing inventory positions may determine the season’s winners and losers.

“I think this is going to be a have/have not holiday season,” said Mark Cohen, a Columbia Business School professor and former CEO of Sears Canada. But he added that the 2021 holiday was so anomalous that the normal process of predicting demand based on the previous year’s performance had “all gone to hell”. 

Federal Reserve officials are scrutinising consumer spending particularly closely as they seek to damp demand with large interest rate increases to tame inflation they deem “unacceptably high”. 

Line chart of real and nominal annual growth in US retailers’ sales (%) showing Inflation is the story behind the holiday sales growth headlines

Lael Brainard, the Fed’s vice-chair, has expressed hope that a reduction in retail margins “could meaningfully help reduce inflationary pressures in some consumer goods”.

Last week she reiterated her view that a bigger stock of inventory could fuel “competitive pressure” to reverse the mark-ups many retailers imposed while the economy was rebounding from the depths of pandemic-induced contraction, and saddled with supply-chain issues.

James Bullard, president of the St Louis branch of the Fed, told reporters last week that businesses face a “very dicey situation if they get the pricing decision wrong”.

“[If] they try to raise prices too much and too far ahead of whatever their rivals are doing, they will lose market share,” he said, adding that such a loss tended to be “permanent, and it can even put you out of business entirely”.

Retail sales last month rose by a higher than expected 8.3 per cent year on year. After the Fed’s most aggressive efforts in decades to tighten monetary policy, however, higher borrowing costs have begun to bite. “Consumers are stepping back, they’re changing how they allocate their spending,” said Mary Daly, president of the San Francisco Fed, last week.

“They’re dealing with high inflation, of course, so they have to make trade-offs and put things back that they would otherwise get, but they’re also preparing for a slower economy. That’s a very good start.”

Because policy changes work with a lag, officials at the central bank expect a stronger economic response in due course, suggesting a far less buoyant outlook for consumer spending next year, when many economists expect a US recession.

“This Christmas season can’t be as good as last Christmas season,” Bullard said on Thursday. “But from my perspective, a slowdown would be fine for the Christmas season.”