US retail sales are surging. The Fed may make that harder to sustain

The Fed's first rate rise since 2023 comes as US retail sales surge, creating a new test for consumer demand – and retailers' ability to turn resilient spending into profitable growth.

But for retailers, the Federal Reserve's decision to raise interest rates for the first time since 2023 means the question is no longer simply whether shoppers will keep buying.

It is whether retailers can maintain strong sales while the cost of borrowing, inventory and imported goods continues to rise.

The Fed raised its target range for the federal funds rate by 25 basis points on Wednesday to 3.75%-4%. The median projection among Fed policymakers puts the rate at 4.1% at the end of both 2026 and 2027, up from 3.8% and 3.6%, respectively, in June.

Those projections are not commitments. But they raise the prospect of borrowing costs remaining relatively high for longer than previously expected.

The decision came just hours after new data showed US retail and food service sales jumping 1.2% in August to $773.9bn, the strongest monthly increase since March and comfortably above economists' expectations.

Sales were 6% higher than a year earlier, while July's decline was revised to 0.5%. The figures are adjusted for seasonal variation but not for price changes, meaning inflation accounts for part of the increase.

Even so, underlying demand remained strong. Retail sales excluding automobiles, petrol, building materials and food services rose 1.4% in August, their strongest increase since September 2024.

For retailers, that creates an unusual combination.

Demand is holding up. But that resilience also reduces the immediate pressure on the Fed to ease monetary policy as it tries to bring inflation back towards its 2% target.

The result could be a retail environment in which revenue remains resilient while the cost of generating that revenue increases.

August's rebound followed a weaker July, but other data suggest the underlying resilience in consumer spending has been more persistent.

The CNBC/NRF Retail Monitor recorded a tenth consecutive month of year-on-year sales growth in July.

Sales excluding automobile dealers and petrol stations increased 5.15% year on year, while core sales, which also exclude restaurants, rose 4.72%.

The Retail Monitor is based on anonymised credit and debit card transactions compiled by Affinity Solutions, providing a different measure from the Census Bureau's survey-based figures.

But the data also highlight an important distinction: consumers can keep spending while becoming increasingly price conscious.