Consumers take a licking but keep on ticking Consumers take a licking but keep on ticking http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\multiple-gas-pumps-small.jpg May 15 2026 May 15 2026

Consumers take a licking but keep on ticking

Strong wealth effect and tax refunds offset rising gas prices.
Published May 15 2026
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Nominal retail sales rose for the third consecutive month in April by a solid 0.5% month-over-month (m/m), buoyed by larger-than-usual tax refunds and the strongest monthly surge in stock prices in six years. To be sure, the ongoing conflict in Iran and the closure of the Strait of Hormuz have sent gasoline prices soaring. They surged 50% over the past two months to an average of more than $4.50 per gallon, sparking a 2.8% m/m surge in spending at gas stations last month.

Moreover, the S&P 500 surged 10.4% in April (and by 19% over the past six weeks) as the index broke above 7,500 for the first time yesterday. The Nasdaq Composite did even better, surging 30% over the past six weeks, also to record highs. The top 10% of Americans as measured by income account for half of consumer spending in the US, so these surging stock prices helped to fuel strong retail sales despite the costs at the pump.

Divergence from bonds Bond investors, however, appear to be much more concerned about the spike in energy prices and the rise in inflation. Benchmark 10-year US Treasury yields have risen from 3.93% at the end of February to 4.57% today, while two-year Treasury yields have risen from 3.4% to 4.07% now. With the upper band of the fed funds rate at 3.75%, there is little chance in our view that the Federal Reserve will ease anytime soon under its new Chair Kevin Warsh.

'Marpril' retail sales solid Each year, we measure the combined consumer results of March and April due to the annual calendar rotation of Easter and Passover. In 2026, “Marpril” rose  a solid 4.5% year-over-year (y/y), compared with a strong 5.1% y/y in 2025 and more modest gains of 3.0% in 2024 and 1.9% in 2023. April was the weaker of the two months, as headline retail sales rose an in-line 0.5% m/m, compared with strong gains of 1.6% m/m in March (0.9% m/m in February). Control results exclude food services, gas stations, auto dealers and building material stores and which feed directly into quarterly GDP calculations. They rose by a better-than-expected 0.5% m/m in April (consensus gain of 0.4% expected), while March and February rose by strong upwardly revised gains of 0.8% and 0.9% m/m, respectively.

Consequently, we expect the Bureau of Economic Analysis to raise first quarter US GDP growth in its revision to be released later this month. The flash reading was a gain of 2.0% quarter-over-quarter, with a personal consumption gain of 1.6% and an increase in private domestic final sales of 2.5%.

Sector details mixed Retail sales at gasoline stations rose 2.8% m/m in April, in the wake of a 13.7% m/m surge in March. Pump prices soared by 53% from $2.98 per gallon at the end of February to a recent four-year high of $4.56. That lags the 85% spike in crude oil (West Texas Intermediate, or WTI) from $65 per barrel at the end of February to $118 on April 7. It has receded to $104. Electronics and sporting goods each rose 1.4% m/m in April, and at 1.1% m/m, e-commerce rose for the fourth consecutive month. Furniture declined 2.0%, clothing 1.5%, and cars and auto parts 0.4%.

What about the impact on inflation? Inflation declined from 40-year highs to four-year lows over the past three years, but this recent damaging spike in energy prices reversed that positive trend:

  • Core PPI wholesale inflation spiked to a 40-year high of 9.7% y/y in March 2022 then plunged to 3.0% y/y in October 2025. But this year, it soared to 3.9% in February, 4.0% in March, and 5.2% in April
  • CPI retail inflation surged to a 40-year high of 9.1% y/y in June 2022 then plummeted to a nearly five-year low of 2.4% y/y in February 2026. But it leapt to 3.3% in March and to a three-year high of 3.8% in April
  • Core CPI spiked to a 40-year high of 6.6% y/y in September 2022 then declined to a more than five-year low of 2.5% y/y this February. But March rose to 2.6% and April increased to 2.8%
  • Core PCE peaked at a 39-year high of 5.6% y/y in Sep 2022 then declined to a four-year low of 2.6% in April 2025. But it increased to 3.0% this February, a three-year high of 3.2% in March and is expected to rise to 3.3% in April

Negative net wage growth? The labor market has been solid so far this year, averaging a monthly gain of 153,000 nonfarm jobs in January, March and April (we are choosing to exclude February’s aberrant results). Initial weekly jobless claims hit a 57-year low of 190,000 for the week ended April 24. April’s average hourly earnings grew at a solid 3.6% y/y, up from a 3.4% gain in March. But that was down from the recent peak of 4.2% y/y in March 2025. In contrast, nominal CPI retail inflation has leapt from a five-year low of 2.4% y/y in February 2026 to a three-year high of 3.8% in April, with no immediate end in sight to the Iran conflict. So, inflation at present is outstripping wage growth.

Tightening their purse strings This trend suggests consumers could well pull in their horns in May. After an early Easter this year, which likely pulled forward solid Marpril spending into the first half of the period, consumers may try to right-size their budgets ahead of the summer-driving vacation season and Back-to-School spending, which start in June. This may be temporary, though that remains to be seen. The personal savings rate has already declined from 5.5% in April 2025 and 4.5% in January 2026 to a nearly four-year low of 3.6% in March 2026, which certainly helped to fuel strong spending over the past three months. The savings rate hit a 17-year low of 2.2% in June 2022, so there’s a limit as to how much less savings can be used for future consumption. 

Business and consumer confidence decline due to the spike in energy prices: 

  • University of Michigan’s Consumer Sentiment Index plunged to a record low of 48.2 in May 2026, down from 56.6 in February 2026. Moreover, Michigan’s one-year inflation expectations are at 4.5% in May 2026, up from 3.4% in February
  • NFIB Small Business Optimism Index fell from 99.3 in January 2026 to 95.9 in April, just off an 18-month low
  • NAHB Housing Market Index (HMI), a measure of homebuilder confidence, plunged from 40 in April 2025 to a seven-month low of 34 in April 2026
  • Conference Board’s Consumer Confidence Index has plunged from 105.3 in January 2025 to 92.8 in April 2026.

Read more about our views and positioning at Capital Markets.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. Indexes are unmanaged and investments cannot be made in an index.

The National Association of Home Builders/Wells Fargo Housing Market Index is a gauge of how well or poorly builders believe their business will do in coming months.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Stocks are subject to risks and fluctuate in value.

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