Dive Brief:

• Retail sales rose more than expected last month as the solid job market, rising real wages and the prospect of steady economic growth prompted consumers to flex their buying power.
• The value of retail purchases increased 0.7% in March from February, and a full 1% when excluding sales of gasoline and cars, the Commerce Department said Monday. Sales for January and February were also revised upward.
• When considering retail sales gains, average 275,000 monthly job increases so far this year and the momentum from 3.1% economic growth last year, “that seems like an economy that is really strong and not being held back by monetary policy,” New York Federal Reserve President John Williams said in a Bloomberg podcast. Even with borrowing costs at a 23-year high, Williams predicted that gross domestic product will likely grow “2% or around that” in 2024.

Dive Insight:

After the release of the retail sales data, the Atlanta Fed upgraded its estimate for the annualized rate in first quarter GDP growth to 2.8% from 2.4%. Consumer spending fuels nearly 70% of economic growth.

Gains in e-commerce led the increase in eight out of 13 categories of retail sales last month, according to the Commerce Department data. Purchases at general merchandise stores also rose, along with those at gasoline stations, which benefited from increased fuel prices.

“This is an unequivocally strong report, with both robust March numbers and hefty upward revisions to January and February pointing to a stronger underlying trend in consumers' spending on goods than seemed likely” before release of the data, Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said in a note to clients.

Traders in interest rate futures on Monday saw 52% odds that the Fed after a two-day policy meeting on July 31 will hold the benchmark interest rate at the current range between 5.25% and 5%, compared with 44% odds on Friday, according to the CME FedWatch Tool.

Higher-than-expected inflation data this year has prompted traders and economists to reduce their predictions of the number of quarter-point cuts by the central bank this year from as many as six to three or less.

The consumer price index in March rose more than forecast for the third straight month. Big gains in transportation and shelter prices helped push up the CPI 0.4% in March and 3.5% on a 12-month basis, well above the Fed’s 2% target, the Bureau of Labor Statistics said Wednesday.

“We’re seeing inflation come down a little bit slower than expected,” Williams said, adding “I don’t see this as a game changer.”

Still, the current level in the federal funds rate is effective at slowing inflation, according to Williams, who serves as vice chair of the policy-setting Federal Open Market Committee.

“Monetary policy is working at the rates that we have now,” he said. “It’s a bumpy road on the inflation front and we’ll just have to figure out how to adjust policy as needed to achieve our goals” of stable prices and maximum employment.

Commerce Department reports on retail sales in January and February “included significant downward revisions to prior months, which pointed to a weakening trajectory for retail spending,” Bank of America Securities said Monday in a research note.

Yet upward revisions in retail data for January and February and “across-the-board” strength in March, “meaningfully alter the narrative around retail spending, which now looks solid for Q1,” Bank of America said.

Consumers face headwinds in coming months and their robust spending may not last much beyond Q1, Allen said.

“It is hard to see how the strength in consumption can continue for much longer, now that real after-tax income growth has slowed markedly, the bulk of excess savings from earlier in the pandemic has been spent and a raft of leading indicators point to a marked softening in the labor market,” he said.