US August retail sales growth surpassed expectations, though momentum may decelerate due to labor market weakness and import tariffs driving up commodity prices.

Data released Tuesday by the US Census Bureau showed retail sales increased 0.6% month-over-month in August, matching the revised 0.6% growth for July.

A Reuters survey of economists had forecast August retail sales to rise 0.2% (retail sales primarily cover goods and are not adjusted for inflation), compared to the previously reported 0.5% increase in June.

The August retail sales growth may partly reflect tariff-driven price increases rather than actual volume gains.

Government data released last week showed the August Consumer Price Index (CPI) posted its largest month-over-month increase in seven months, with significant price rises across various goods including food and clothing. Current labor market weakness—with companies delaying hiring due to economic uncertainty, resulting in minimal job creation and rising unemployment—poses risks to consumer spending.

Markets expect the Federal Reserve to announce a 25 basis point rate cut Wednesday to support the labor market. The central bank paused its easing cycle in January due to uncertainty over the inflationary impact of import tariffs.

Core retail sales, excluding autos, gasoline, building materials and food services, increased 0.7% month-over-month in August, while July's core retail sales growth remained at 0.5% (unrevised). This "core retail sales" measure has the strongest correlation with the consumer spending component of Gross Domestic Product (GDP).

Consumer Spending Expected to Moderate

"Despite underlying resilience in consumer spending, overall growth is slowing. Households currently retain spending capacity overall, but growing concerns about the labor market suggest consumption growth may decline during the remainder of this year," said Sam Bullard, senior economist at Wells Fargo.

A survey released Monday by the Federal Reserve Bank of New York showed US household spending in August, unadjusted for inflation, fell to its lowest year-over-year level in nearly four and a half years.

Nevertheless, more consumers continue purchasing electronics, appliances, furniture, acquiring property and vehicles, while undertaking home improvements or vacations.

Similarly, a Bank of America Institute survey found low-income households were hit hardest by labor market weakness, with this group's year-over-year after-tax wage growth falling to its lowest level since 2016 in August.

Bank of America Institute also noted that younger demographics and "Generation X" (born 1965-1980) showed the slowest consumption growth rates.

"Labor market weakness appears particularly pronounced for younger workers, especially as job-switching wage premiums have diminished significantly compared to previous periods," the Institute stated.