Retail Sales Boost Fed Rate Hike Case

• Retail sales ex-autos reached 1.4% (double estimates), while ex-autos and gas hit 1.2% (triple expectations), the strongest in nearly three years
• Import prices climbed to a four-year high of 7.0% year-over-year, up from 6.1% in July, reflecting pressure from global tariffs and elevated oil prices
• New Fed Chair Kevin Warsh faces his first major policy test, with Minneapolis Fed President Kashkari advocating for a 25-basis-point rate hike amid concerns about 'entrenched inflation' from prolonged supply shocks

Summary: Retail Sales Boost Fed Rate Hike Case

Key Economic Data:

U.S. retail sales for August surged to +1.2%, significantly exceeding the +0.8% consensus estimate by 40 basis points. This marks the second-highest reading of the year, trailing only March's +1.7%. Excluding auto sales, retail sales jumped +1.4%—more than double expectations—while ex-autos and gas reached +1.2%, triple the anticipated +0.4%. The latter figure represents the strongest retail sales performance in nearly three years.

Import prices rose +0.7% in August versus a +0.4% estimate, rebounding from the previous month's -0.3%. Year-over-year import prices hit a four-year high of +7.0%, up 90 basis points from July's revised +6.1%. Excluding petroleum, imports increased +0.8%, substantially above the +0.3% forecast. Export prices met expectations at +0.6% month-over-month but showed year-over-year growth of +8.6%, highlighting a cost imbalance as imports outpace export revenues.

Market Implications:

The robust retail sales data demonstrates resilient consumer spending despite elevated gas and housing costs, supported by near-4% unemployment. These figures strengthen the case for a Federal Reserve rate hike, with odds currently exceeding 90%.

The FOMC decision is particularly significant as new Fed Chair Kevin Warsh faces his first major test. Minneapolis Fed President Neel Kashkari has advocated for a 25-basis-point hike, warning that prolonged supply shocks—such as the seven-month Iran war driving record diesel prices—could lead to "entrenched inflation."

Current fed funds rate stands at 3.50-3.75%, with the decision expected at 2pm ET.