Retail Sales August 2025

Strong August retail sales as consumers try to push through, but retail is under pressure

• Retail sales posted a stronger-than-expected 0.6% gain in August, supported by back-to-school spending and end-of-summer dining. However, tariff pressures are becoming increasingly visible, with several retail categories registering volume declines as some households struggle to absorb higher prices. With early August levies likely to fuel a gradual and uneven reacceleration in inflation — and softening labor market conditions beginning to constrain household purchasing power — the outlook for consumer spending remains reserved.
  
  
• The top three categories driving retail sales in August were online purchases, clothing, and sporting goods, hobby, musical instruments and books — highlighting a solid boost from back-to-school shopping. Spending at restaurants and bars rebounded 0.7%, though this appears to be more of a temporary bounce, likely supported by equity market strength and seasonal enthusiasm among higher-income households, rather than the start of a sustained trend. Core retail sales — which exclude autos, gas and building materials to better reflect underlying consumer demand — rose a much stronger-than-expected 0.7%, while the July advance was revised up slightly to 0.5%.
  
  
• Adjusted for inflation, the picture is less upbeat, revealing consumers struggling to absorb tariff-induced price hikes. Real retail sales volumes rose a modest 0.2%, while core retail sales were up 0.5% — despite notable pullbacks in tariff-affected segments such as building materials, furniture, groceries and electronics. The annual growth rate in nominal retail sales rose to 5.0% year over year (y/y), while real retail sales growth firmed to 2.0% y/y, largely due to base effects.
  
  
• Labor market headwinds — including rising unemployment, fewer job openings and slower wage growth — are expected to weigh on income momentum in the coming months. Combined with elevated costs and heightened price sensitivity, this will likely dampen consumer purchases and compress retailer margins. We expect real consumer spending growth to decelerate from 2.4% y/y in Q2 2025 to 1.0% y/y by early 2026, and to maintain a modest pace below 1.5% through next year.
  
  
• While markets are currently pricing in three rate cuts before year-end, we believe the Fed will proceed gradually. Following a 25 basis point (bps) rate cut in September, an October cut remains possible but would likely require a negative — or near-zero — September payroll print. For now, we anticipate a second 25bps cut in December, followed by an additional 100bps of easing through 2026. Importantly, the more pronounced the inflationary impulse from recently imposed tariffs, the stronger the pushback from hawkish Federal Open Market Committee (FOMC) members against further policy easing is likely.
   

In the details

Retail sales posted another solid gain in August, rising 0.6% month over month and building on the upwardly revised 0.6% increase in July. Online sales surged 2.0%, likely driven by parents hunting for the best back-to-school deals. Clothing and accessories stores also experienced strong back-to-school momentum, with sales up 1.0%. Similarly, sporting goods, hobby, musical instruments and bookstores benefited from the seasonal tailwind, rising 0.8%.

Importantly, however, tariff-induced sticker shock is forcing many households to spend more parsimoniously. Volumes in the clothing and broader sporting goods, hobby, musical instruments and books category rose a more muted 0.5% and 0.1%, respectively.

Spending at restaurants and bars rebounded 0.7% in nominal terms but only rose 0.4% when adjusted for inflation. We believe this represents more of a one-time bounce, with households likely to pull back on outings as cooler temperatures and higher prices restrain their appetite.

Motor vehicle purchases rose 0.5% following strong gains of 1.2% and 1.7% in June and July, respectively — though sales remain nearly 1% below their December 2024 level. In volume terms, motor vehicle sales were flat in August. While automakers have so far shielded consumers from the brunt of tariff impacts, this buffer is unlikely to last. As higher costs increasingly reach consumers, vehicle sales are expected to gradually lose momentum in the months ahead.

Sales of tariff-sensitive goods were soft: furniture (-0.3%), health and personal care (-0.1%), merchandise stores (-0.1%), building materials (+0.1%), electronics (+0.3%), and groceries (+0.3%) — suggesting that the effects of higher tariffs on consumer demand are only gradually building. In volume terms, the pressure was even more evident: furniture (-0.5%), health and personal care (-0.2%), merchandise stores (-0.5%), building materials (-0.7%), electronics (-0.1%), and groceries (-0.3%).

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.