Back-to-School bonanza

September retail sales beat expectations at 0.8% growth, driven by a surge in gas station sales due to rising energy prices. Excluding autos and gas, sales were a much more modest 0.2% increase. This highlights how energy costs are distorting the picture and pushing up headline inflation.

The strong back-to-school season, up 5.6% year-over-year, and a robust labor market remain tailwinds for consumer spending. Average hourly earnings growth is at a five-year low, and unemployment for less-educated workers hit a 34-year low. These factors, combined with a four-year bull market in equities, are supporting spending.

However, business and consumer confidence have fallen sharply due to higher energy prices and the start of a Federal Reserve rate-hiking cycle. The Fed hiked rates by a quarter point in September, and we anticipate two more hikes. We forecast a solid Christmas season with retail sales growth of 5.0-5.5%, but watch for any further escalation in energy prices and their impact on inflation and consumer sentiment.