Key Points at a Glance:

  • Retail sales rose 0.5% month-over-month in April, a marked slowdown from March's 1.6% gain, as war-driven price pressures outpaced wage increases, eroding purchasing power across many product categories.
  • Compared with April 2025, sales increased 4.9%, according to data released Thursday by the U.S. Census Bureau. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said retail sales could weaken in the coming months as consumers spend their remaining income tax refunds.
  • "The refund stream will drop off sharply in May, leaving consumers more exposed to the surge in fuel costs caused by the war," Allen noted in a report. "Given depressed confidence, a softening labor market, and an already very low personal saving rate, we expect a marked pullback in discretionary spending in the second half of the second quarter."

In-Depth Analysis:

Consumer confidence has fallen to historic lows this year as households struggle to cope with a resurgence in inflation. Data released Tuesday by the U.S. Bureau of Labor Statistics showed the Consumer Price Index (CPI) surged to 3.8% year-over-year in April, a three-year high.

Energy costs rose 17.9% over the past year, with gasoline prices up 28.4% and heating oil prices up 54.3%. Food prices increased 3.2% year-over-year. Core CPI, which excludes energy and food prices, rose 2.8% year-over-year.

Meanwhile, data released Friday by the U.S. Bureau of Labor Statistics showed wages grew only 3.6% year-over-year in April, falling behind inflation for the first time in three years.

"In my travels across New England, I've found concerns about high prices are everywhere, especially among middle- and lower-income households," Boston Federal Reserve Bank President Susan Collins said in a speech Wednesday. Collins noted that consumers expect inflation to eventually cool, but she warned "we cannot take that anchoring of expectations for granted," "particularly in the current environment, where price increases have affected fuel and may soon affect food—items that are most salient to consumers."

As affordability of goods and services declines, households are cutting back on spending for meat, poultry, and other groceries. The Richmond Fed noted Tuesday, citing March data, that consumer spending on food services, healthcare, accommodation, and outbound travel also declined in March, the first full month after the outbreak of the Iran war.

The Richmond Fed said consumers may be maintaining spending by reducing savings, noting that the personal saving rate fell to 3.6% in March, the lowest since October 2022. Consumer spending in March exceeded expectations in categories such as recreation and motor vehicles. "These saving and spending choices suggest that high energy prices may have disrupted consumers' willingness to spend, but not destroyed it," the Richmond Fed said.