A Shift in Consumer Behavior Raises Policy Questions

A fresh batch of U.S. macroeconomic data released this week paints a complex picture of the world’s largest economy. Retail sales plunged well below expectations, export prices declined sharply, and yet, the Retail Control group—closely tied to GDP—showed some resilience. The combination of softer consumer spending and easing inflationary pressures may impact the Federal Reserve’s monetary strategy heading into the second half of 2025.

Wall Street Reacts: Retail Sales Surprise to the Downside

Headline retail sales fell by 0.9% in May, far worse than the anticipated 0.5% decline. More concerning was the core retail sales reading (excluding autos and gasoline), which also dropped by 0.3%, against forecasts for a 0.2% increase. These figures suggest that American households are beginning to pull back meaningfully on discretionary purchases, despite stable employment conditions and fading inflation.

This sharp downturn raises concerns that persistent price pressures and elevated interest rates may have eroded consumer purchasing power and confidence. If this trend continues, it could spell trouble for a consumer-driven economy that has so far shown surprising durability.

Retail Control: A Silver Lining for GDP Estimates

On a more positive note, the Retail Control group—which filters out volatile categories to better reflect GDP-related consumption—rose by 0.4% in May, slightly above the 0.3% consensus. This followed a downwardly revised -0.1% figure from April. The rebound in this measure offers hope that while overall retail spending has weakened, the core components of consumer demand remain active, at least in essential or less price-sensitive categories.

This distinction is important, as the Retail Control group directly feeds into GDP calculations. For now, it suggests that second-quarter economic growth may remain in positive territory, though at a slower pace.

Trade Price Indexes Point to Softening Inflation Pressures

Additional data released at the same time showed easing inflationary trends in external trade. The Export Price Index fell sharply by 0.9%, compared to expectations of just a 0.1% decline and following a 0.1% increase in April. This steep drop could reflect both weakening global demand for U.S. goods and more aggressive pricing strategies by American exporters.

Meanwhile, the Import Price Index held flat at 0.0%, beating the expected -0.2% reading. The data signals a further moderation in supply-side inflation pressures, reinforcing the view that inflation is losing momentum, both domestically and internationally.

Market Implications: A Shift in Rate Cut Expectations

The market’s immediate response was relatively muted, but rate expectations shifted notably. Fed Funds Futures now price in over a 60% probability of a rate cut at the September FOMC meeting, up from 40% before the data release. The combination of cooling consumption and tame price growth provides the Fed with more flexibility to pivot toward easing, should the economic slowdown deepen.

That said, Federal Reserve officials may remain cautious. They will likely need to evaluate whether this is a temporary data blip or the beginning of a more structural deceleration. After all, monetary policy is now at an inflection point: interest rates are restrictive, yet inflation is falling and real economic momentum is slipping.

Macro View: The Fine Line Between a Soft Landing and a Slowdown

These May figures reinforce the soft landing narrative—where inflation eases without a recession—but also introduce new complexities. If both prices and demand weaken simultaneously, the central bank could face a tough balancing act: avoid triggering a contraction while keeping inflation expectations anchored.

Upcoming data on CPI, PCE, and labor market indicators will become increasingly critical in shaping the Fed’s next move. Policymakers are watching closely for signs that consumer activity, the engine of U.S. growth, is slowing too much, too fast.

The sharp drop in headline retail sales is particularly alarming when viewed against the backdrop of rising credit card delinquencies and flat wage growth. Consumers may be signaling that post-pandemic resilience is giving way to fatigue.

Conclusion: Data Sends Mixed Signals, Fed Faces Delicate Path

The latest data on retail sales, trade price indexes, and GDP-related consumption paints a picture of an economy that’s cooling, but not collapsing. Inflation is moderating, but the consumer—who has been holding up growth—is showing signs of strain. The Fed now faces the challenge of interpreting these signals accurately and deciding whether to maintain restrictive policy or begin easing into the fall.

As financial markets recalibrate their expectations, all eyes turn to the Fed’s July and September meetings. The question is no longer whether a rate cut will occur in 2025—it’s how soon, and under what conditions.