US retail sales strong in February; an increase in the price of petrol will affect spending

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A prolonged war and further increases in fuel prices could limit the expected increase in consumer spending and the economy as a whole from the tax cuts, economists have warned. They expected the conflict to weigh on growth in the second quarter.

“I expect that consumer spending will be softer in the first half of the year than it would have been if there had been no increase in the price of gasoline, but I predict that the price of energy will fall significantly in the next few months, allowing real spending to return in the second half of the year,” said Stephen Stanley, chief economist for the US at Santander US Capital Markets.

Retail prices rose 0.6%, the biggest increase since last July, after falling as much as 0.1% in January, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and not adjusted for inflation, to rise 0.5% after a previously reported 0.2% drop in January.

The Census Bureau is holding back data releases after delays caused by last year’s government shutdown.

One of the increases in retail sales reflected higher gasoline prices, which had begun to rise in anticipation of the Middle East war. In addition to expensive gasoline, consumers are also facing higher prices at the store from President Donald Trump’s tariffs.

The broad increase in sales was driven by tax returns. The average refund was $350 through March 20 compared to the same period in 2025, Internal Revenue Service data showed.

“Tax refunds keep the economy in the first quarter,” said Christopher Rupkey, chief economist at FWDBONDS. “Cheap consumer goods at least until the tax refund ends.”

Receipts at auto dealers rose 1.2% amid promotions and discounts, after falling 0.7% in January.

Sales at electronics and appliance stores rose 0.5%, while those at building materials, garden equipment and furniture retailers rose 0.4%. Sales receipts at clothing and apparel stores rose 2.0%.

Non-retail sales, which include online stores, increased by 0.7%. Sales at service stations rose 0.9%. Sales of sporting goods, hobbies, musical instruments and bookstores increased by 1.3%.

But merchandise sales fell 1.0% as did food and beverage store receipts.

Sales in food and beverage services, the only service sector in the report and a measure of discretionary spending, advanced 0.4%. Economists consider consumption to be a key indicator of household finances, which have been threatened by the month-long conflict, which wiped $3.2 trillion off the stock market in March. High-income households lead consumer spending, which is supported by strong economic conditions.

Stocks on Wall Street were trading higher. The S&P 500 index in March posted its biggest month-to-month decline on the year. The dollar retreated against a basket of currencies. US Treasury yields rose.

A LONG TIME TO LIVE IN FAKES

Retail sales excluding autos, gasoline, building materials and food services increased 0.5% in February after rising 0.2% in January. These so-called primary items of retail sales are closely related to the consumer consumption share of gross domestic product. Consumer spending fell in the fourth quarter, helping to limit GDP growth to an annual rate of 0.7%. The economy grew at a rate of 4.4% in the third quarter.

The Atlanta Fed estimates that GDP growth increased by 1.9% in the first quarter. Those expectations were supported by a survey by the Institute for Supply Management, which showed that its manufacturing PMI reached 52.7 in March, the highest number since August 2022, up from 52.4 in February.

It was the third consecutive month the PMI was above the 50 level, which indicates expansion. It is possible that part of the increase in inventory is due to lengthening supplier supply times, which are often associated with a strong economy and increased consumer demand. However, in this instance, the slow supply of exporters may reflect supply chains that have been disrupted due to shipping restrictions through the Strait of Hormuz and tariffs.

Apart from energy products, exports of fertilizers and aluminum have also been affected.

ISM Manufacturing Business Survey Committee Chair Susan Spence noted that “64% of the overall sentiment was negative,” adding that “about 20% cited tariffs and about 40% the Middle East war.”

Those higher prices will feed into consumer inflation. The Cleveland Federal Reserve predicts that the Consumer Price Index rose 0.84% ​​in March, which translates to an annual increase of 3.25%. The CPI rose 0.3% in February and advanced ⁠2.4% year-on-year. The Bureau of Labor Statistics is scheduled to release the March CPI report on April 10.

In revised estimates released alongside the decision, policymakers expected inflation to rise and only one reduction in borrowing costs in 2026.

“The strength of consumer demand and commodity trading will also be tested in the second quarter as prices rise,” said Scott Anderson, chief US economist at BMO Capital Markets. “Producers are entering the second phase because of a much weaker base.”

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