August Retail Sales Surge Driven by Inflation — September Shows Cooling Trend

In August 2025, U.S. consumer spending proved more resilient than many economists had forecast. Retail and food services sales increased 0.6% over July, and by 5.0% year-over-year, surpassing consensus forecasts of around 0.2% monthly growth. Excluding volatile categories like autos and gasoline, growth held solidly at around 0.7%. This strength signals consumers are still willing to spend despite macroeconomic headwinds, including inflation, tariffs, and signs of softening labor market metrics.

However, a key caveat lies in inflation. With consumer prices rising roughly 2.9% annually and tariff effects pushing up costs in many categories, much of August’s nominal gains are erosion rather than pure volume expansion. For example, unit demand in certain back-to-school categories was flat or declining even while dollar sales rose, suggestive of price effect dominance. Thus, real consumption growth—adjusted for inflation—is notably more subdued.

September’s data reveals emerging cracks in momentum. While retail and food services still grew (0.2% MoM), the pace was significantly slower than the prior months’ 0.6% increases. Lower- and middle-income households appear especially squeezed, particularly by rising costs for essentials such as food, rent, and imports influenced by tariffs. Employment growth has weakened, and unemployment edged up to 4.4%, constraining spending further. Inflation also stayed elevated, and core measures remain sticky.

Sectors show clear winners and losers. Nonstore retailers (mainly e-commerce) are surging, up about 10.1% year-over-year in August, followed by clothing/accessories and dining/food services. In contrast, department stores declined, and gasoline station sales dropped year-over-year, underscoring energy price volatility and structural shifts toward digital retail channels. Independent local retailers saw same-store sales jump ~8.3% YoY in August, but average item prices also rose sharply, indicating inflation pressures are widespread even in small retail contexts.

Strategically, these trends imply several implications. First, the Federal Reserve may feel less urgency to raise rates but will also be cautious about cutting them too aggressively given inflation persistence. Second, discretionary spending seems increasingly bifurcated: high-income consumers continue to support experiential and digital retail, while lower-income consumers gravitate toward necessity spending and value channels. Third, businesses exposed to elevated input costs or operating in declining categories (department stores, gasoline) may face headwinds unless they innovate or adapt pricing/assortment strategies. Finally, the changing cadence of traditional seasons (e.g. back-to-school promotions stretching) means that retailers and marketers must become more agile and less reliant on fixed seasonal cycles.