Source: Bloomberg

Today’s retail sales reports are consistent with yesterday’s inflation data: We have failing demand in large parts of the economy, namely the ones that reflect the activity of the lower-income half of US households. This is reflected in weak retail sales ex-auto and gas, and sharply declining inflation in consumer prices ex-auto, gas and housing.

The housing component of CPI is problematic at best (homeowners buy a house and sell themselves the service of living in it according to the Bureau of Labor Statistics). It is distorted by the fact that with mortgage rates under 4%, home investment is an attractive investment for affluent households. But goods prices actually are declining, and CPI excluding housing, food and energy rose just 0.5% year-on-year. The wealth effect from equity and home price gains is keeping the US going, but the impact of low wage growth and fraying consumer balance sheets is a significant drag.

RBC points out that non-store retailers (online sales) showed a decline, which might point to measurement errors. It is often the case that the Census Bureau has difficulty measuring online sales, but monthly declines on the magnitude of August are not at all unusual (see chart above).