How Good Are Retail Sales Figures If You Consider Inflation?

 |  Includes: XRT
by: Daryl Montgomery

Unadjusted for inflation, U.S. retail sales rose 1.1% in February. There may have been little or no gain if price increases are accurately taken into account.

Retail sales going up in the beginning months of the year should surprise no one because this is when companies typically raise prices. Anyone who goes to Starbucks (NASDAQ:SBUX) is aware of this practice. It pervades a number of industries across the spectrum. Clothing prices are being hit particularly hard this year with jumps in prices estimated to be around 10% for the spring season (already underway in February). Mainstream media reports on February retail sales did glowingly mention that sales at clothing stores were higher while neglecting to report that higher prices were the reason.

This is not the only source of price increases in early 2012 however. Year over year gasoline had the second greatest percentage increase (10.3%) in the retail sales report. This can be considered a measure of energy inflation and not an indication that more product is being sold. A rough approximation of food inflation can be garnered from the Food and Beverages category. Year over year this increased by 3.7%, while the U.S. population is estimated to have grown only 0.7%. If inflation is the actual driver of higher retail sales, it would be reasonable to assume that the one area with chronically lower prices - electronics - would see a decline in sales. Year over year, sales in the Electronics and Appliance category did indeed fall by 1.4%.

Interestingly, the biggest increase in any retail sales category was in Building Materials and Garden Supplies. This was up 13.8% year over year. It is quite possible that the unusually warm winter weather pushed garden supplies purchases into February, instead of March (the numbers are seasonally adjusted and much higher garden supply sales in February would be magnified because of this). Prices for many building materials are rising sharply as well. Lumber has been the one major exception, but even lumber prices rose this February.

Retail sales account for approximately 70% of the U.S. GDP, so how they behave gives a good indication of how the economy is performing. Higher inflation is not an indication of a better economy though, it indicates just the opposite. The U.S. retail sales numbers are not adjusted for inflation, nor are the CPI numbers an adequate indication (they underestimate the actual inflation rate significantly). Analysis of the February report indicates that inflation is allowing the government to report better numbers. Investors need to keep this in mind.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.