Retail sales are one of the first places investors turn to to find out how things are going for American consumers, but sales figures may underestimate how much consumer demand is.

The Commerce Department said Tuesday that retail sales, covering costs in stores, restaurants and online, rose 0.9% in April with seasonal adjustments from a month earlier. It was slightly below economists ’forecast of 1%, but as it came with a major revision of retail sales in March upwards – the Department of Commerce now says they rose 1.4% from a month earlier compared to 0.5% – this was credited as a solid report.

This was considered solid even in the context of what is happening with inflation: last month’s sales grew faster than overall consumer prices rose 0.3% in April compared to March, the Labor Ministry reported last week. In addition, retailers are mainly engaged in the sale of goods, and sales in restaurants, bars and other places of food and drink – the only major category of services included in the report on Tuesday. And commodity prices, although significantly higher than a year earlier, actually fell slightly in April since March.

The commodity-oriented nature of the retail sales report also means that investors need to be careful in how they interpret it. Since the beginning of the pandemic, American households have devoted much more of their spending on material things than before, resulting in both increased demand for goods, which provoked the Covid-19 crisis, and much higher inflation of goods compared to services. In the first quarter, spending on goods accounted for about 35% of household spending, compared to 31% in the fourth quarter of 2019. To return spending on goods and services to the previous balance, sales of goods had to decline by about 11% and sales of services had to increase by about 6%.

Of course, no one knows what the equilibrium cost of goods and services will end up being, but the share of services is likely to increase. People are re-engaging in activities they cut during the pandemic, such as travel, while demand for items such as furniture can be relatively met. Moreover, higher prices for goods can make services more attractive.

The steady increase in spending on catering and drinking services, shown in a report on Tuesday – it grew by 2% compared to March and 19.8% compared to the year before – can be instructive for where the cost of services goes. Excluding restaurants and bars, sales grew 6.7% over the year.

Tuesday’s report was taken on Wall Street as a sign that despite concerns about inflation and the Federal Reserve’s efforts to slow the economy, consumers are alive. They could push the economy far beyond the Fed’s goals.

Airlines, gas stations, and retailers use sophisticated algorithms to adjust their prices to suit costs, demand, and competition. Charity Scott of the WSJ explains what dynamic pricing is and why companies use it more often. Illustration: Adele Morgan

Write Justin Lahart at justin.lahart@wsj.com

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