Getting a Little Costs a Lot!

You spent more money in 2024 but didn't get very much more stuff. 

Retail sales rose 3.9 percent last year. Based on that number alone, you might think Americans consumed a lot more goods and services than they did the previous year. You might further conclude that they were a lot better off.

But that's not necessarily the case.

Retail sales are not adjusted for price inflation. Factoring in a 2.9 percent CPI, we find that rising prices accounted for nearly 75 percent of the annual increase in retail sales. 

In other words, consumers spent a lot more money in 2024, but they didn't get much more for their money than they did in 2023.

We see the same phenomenon in the monthly data. Retail sales rose 0.4 percent in December. However, the December CPI rose by 0.4 percent as well. That means price inflation accounts for the totality of the December increase in retail sales. Sales didn't increase -- prices did.

Keep in mind that the CPI doesn’t tell the entire story of inflation. The government revised the CPI formula in the 1990s so that it understates the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers. So, if the BLS was using the old formula, we’re looking at CPI closer to 6 percent. And using an honest formula, it would probably be worse than that.

When you put retail sales data into this context, it’s logical to conclude that American consumers haven’t been spending more because they’re confident about the economy. They're not better off because they’re getting more stuff. They’re just shelling out a lot more money for the same amount of stuff they were getting before -- and in some cases even less stuff.

This is an involuntary spending spree. American consumers are spending hand-over-fist to keep up with surging prices. They're not getting more stuff.

Understanding Retail Sales Data

Retail sales are calculated by multiplying the price of goods sold by the quantity of goods gold (Sales=PxQ). That means the data reported by the Commerce Department reflects both the amount of goods and services purchased by consumers and any price changes.

When price inflation is high, retail sales will generally move higher, unless consumers cut back spending enough to offset rising prices. During deflationary periods (falling prices), retail sales fall, all things being equal, unless people up their volume of purchases enough to offset falling prices. 

For instance, let's say a widget costs $1. If consumers purchased 100 widgets last month, retail sales were $100 (1x100=100). Now let's say the price increases to $2 this month. Due to the higher price, consumers only purchased 60 widgets. Retail sales would increase to $120 (2x60=120). The news would report retail sales rose by 20 percent. Talking heads on CNBC would gush about how well consumers are doing.

But in reality, consumers did a lot worse. They paid more and bought less.

Price Inflation Is Gobbling Up Your Wages

Looking at it from the other side of the equation, price inflation is eating up your earnings. 

Let's say you got a 4 percent raise last year. That sounds pretty good on the surface. But when you factor in rising prices, your purchasing power only increases by 1.1 percent based on the 2.9 percent CPI. 

According to the Bureau of Labor Statistics, real average hourly earnings increased modestly by 1.0 percent, seasonally adjusted, from December 2023 to December 2024.

In other words, that raise you got wasn't as great as it sounded at the time.

All of this underscores the pain of price inflation. It steals your purchasing power. Thanks to the ever-devaluing dollar, you have to work harder and harder just to maintain your standard of living. This is precisely why so many people find it impossible to get ahead.

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