March’s retail sales posted weaker growth than forecast as red-hot inflation continued to drag sales volume lower, adding downside risks to our forecast for economic growth that might dip below 1% in the first quarter.

The headline sales number increased by 0.5% on the month, according to Commerce Department data released Thursday. With inflation registering at a 1.2% monthly gain in March, our estimate pointed to a decline in retail sales volume after adjusting for inflation.

Skyrocketing prices at the gas pumps and grocery stores drove spending on other categories within the control group to decline by 0.1% on the month. This group excludes autos, gasoline, building materials and food services and feeds directly into the calculation of gross domestic product.

The bright spot, though, came from the revisions to February data as the headline sales figure was revised upwardly to 0.8% from 0.3% while the control group was also revised upwardly from down by 1.2% to down by only 0.9%.

On a quarterly basis, total retail sales rose by 4.2% in the first quarter, and by 1.7% after adjusting for inflation, again pointing to weaker growth than previously anticipated in consumption, which accounts for about 70% of total GDP. Data on the GDP growth rate for the first quarter will be published in two weeks.

What has become more evident is that most Americans who live paycheck to paycheck won’t be able to rely on the trillions of dollars of excess savings that has been accumulated during the pandemic and has been a major lifeline for growth.

Those are low- and middle-income families that spend the biggest share of their incomes on gasoline and food, and have had to pull back on discretionary spending.

While retail sales at the pumps rose by 8.9% on the month, the gain was entirely because of rising gasoline prices, which recorded a 18.3% increase in March alone.

Nonstore retail sales that mostly made up of online sales dropped by 6.4% in March, the second straight month of declines, following a 3.5% drop in February.

Sales at general merchandise stores surged by 5.4% after a disappointing 0.2% decline in the prior month. That suggests a shift in spending behaviors as COVID-19 retreated during the month and shoppers enjoyed in-person shopping more.

The takeaway

As significant revisions will be added to the advance sales data in the next release, it is too soon to predict a substantial slowdown in spending in the next couple of months. With oil prices coming down significantly since the start of the war in Ukraine, we should expect some relief in gasoline prices.

Inflation may have peaked in March, which potentially helps to ease some of the pressure on spending next month. But we remain cautious as the spillover risks from the geopolitical tensions in Ukraine continue to loom large.