Retail Sales Headline Masks Continued Consumer Strength
Recent headlines announced July retail sales falling -0.6% month over month, missing as estimates forecasted growth to be +0.1% for the month. However, this headline figure does not fully reflect the current condition of the consumer. The largest contributor to the drag in July came from non-store retailers, where sales declined -2.2%.1 This drag was attributed to Amazon moving Prime Day from July into June and pulling forward demand that would normally have appeared in the July report. This shift means that the weakness in online sales was a timing issue rather than an indication of deteriorating consumer demand. Meanwhile, the forecast highlighted several important consumer categories showing continued growth for the month. Clothing and clothing accessories stores increased +1.9%, food services and drinking places rose +0.5%, while general merchandise stores and building materials and garden equipment each increased +0.3%.2 These underlying details present a more resilient picture than the headline number suggests, particularly when viewed alongside the strong consumer trends being reported directly by major retailers and financial companies.
Inflation Remains Contained and Creates a More Favorable Consumer Backdrop
The latest inflation reports also provide a constructive backdrop for the consumer. July CPI increased 0.1% month over month and 3.4% year over year, both in line with expectations. Core CPI rose 0.2% for the month and 2.5% year over year, also matching estimates. Energy was one of the largest sources of relief, falling 1.5% during the month as gasoline prices declined 2.9%.3 Food at home, an issue which has recently become center stage, also declined 0.1%, led by lower prices for meats, poultry, fish, and eggs. Producer prices were similarly contained with headline PPI was unchanged in July compared with expectations for a 0.2% increase, while core PPI rose just 0.2% versus expectations for 0.3%. Energy prices declined 3.1% for the month, marking the second consecutive monthly decline, with gasoline prices falling 5.7%.4
While some service categories remained a source of inflation, including portfolio management, which increased 6.5%, and construction, which rose 2.2%, the broader data shows that price pressures have not accelerated meaningfully. Lower energy and food costs should provide an additional benefit to consumer purchasing power while also helping companies manage their input costs. Restaurants, for example, can benefit from lower meat, poultry, egg, and produce costs, providing more room for margins if menu prices remain steady. At the same time, companies with pricing power can continue to benefit from firm prices. Auto service chains have seen labor and parts pricing increase 6.6% year over year, allowing pricing to support margins while demand remains sticky. Sporting goods retailers are seeing a similar benefit, with sporting goods and bicycle pricing up 4.3% and 5.6% year over year respectively, supporting revenue growth even without requiring an equivalent increase in unit sales.5
Major Retailers Continue to Show Strong Growth and Pricing Power
The most encouraging evidence continues to come directly from the earnings releases from the largest retailers serving the consumer. Amazon delivered another very strong quarter. Outside of their high growth exposure in AI, their core retail segment performed well with North America sales increasing 16% year over year and online store sales rising 14.5%. Along with this, third-party seller services increased 15%, advertising grew 26%, and subscription services increased 12%. Grocery remains an important growth driver, with monthly active perishables customers growing more than 50% since the beginning of the year. Same-day and overnight deliveries increased more than 40% globally during the first half of 2026, while Prime membership growth remained double-digit and paid units increased 17%.6 These results are particularly important in the context of the July retail sales report, as Amazon’s strong underlying growth further supports the view that the decline in non-store retail was related to a timing shift relating to Prime Day as the online retail giant continues to perform in a meaningful way.
Target provided another encouraging sign that consumer demand remains healthy as its comparable sales increased 3.8%, ahead of expectations, with traffic increasing 3.6% and digital sales rising 8.7%. Same-day delivery grew more than 25%, while the company saw growth across all six merchandise categories. Food and beverage and beauty both grew at high-single-digit rates. Alternative revenue streams also continued to perform well, with Roundel gross billings increasing nearly 20%, Target+ marketplace GMV growing more than 40%, and Circle 360 membership revenue rising more than 40%. Even excluding the tariff refund, Target expanded gross margin by approximately 100 basis points year over year and improved operating margin by roughly 70 basis points,7 demonstrating that the improving sales environment is also translating into better profitability.
Costco continued to demonstrate healthy consumer spending as well, with total revenue increasing 12% year over year and comparable sales excluding fuel and foreign exchange increasing 6.6%. U.S. comparable sales excluding gas and foreign exchange increased 6.8%, while membership fees grew 11%. Transaction growth remained positive at 4.2%. Importantly, the results also show how pricing can contribute to sales growth, with the average transaction increasing 5.1% overall and 2.9% excluding gas and foreign exchange.8 While traffic growth moderated, consumers continued to spend more per transaction, supporting the overall sales performance.
Consumer Spending Remains an Important Driver of Economic Growth
The resilience of the consumer is also continuing to support the broader economic outlook. The Atlanta Fed’s GDP Now index currently projects third-quarter real GDP growth of +4.31%. While this has moderated from the previous +5.83% forecast, consumption remains an important contributor, with PCE accounting for +1.71% of the current growth estimate.9 The recent data continues to support a bullish view of the consumer and the broader economy. The July retail sales decline was heavily influenced by the timing-related pull forward from Amazon Prime Day and does not appear indicative of broad demand deterioration. Meanwhile, major retailers like Amazon, Target, and Costco are signaling for continued strength seeing increasing growth, pricing, and traffic trends across several consumer categories. Combined with contained monthly inflation, lower energy and food costs, continued spending growth, and a meaningful contribution from consumption to economic growth, the consumer continues to provide an important source of support for the economy. We will continue to watch for changes in spending patterns, traffic and inflation, but the current retail earnings and consumer data suggest that demand remains considerably stronger than the July headline retail sales figure alone would initially imply.
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[1] United States Census, as of August 14, 2026
[2] United States Census, as of August 14, 2026
[3] Bureau of Labor Statistics, As of August 12, 2026
[4] Bureau of Labor Statistics, As of August 12, 2026
[5] Bureau of Labor Statistics, As of August 12, 2026
[6] Amazon 2Q26 Earnings Call, as of July 30, 2026
[7] Target 2Q26 Earnings Call as of August 19, 2026
[8] Costco 2Q26 Earnings Call, as of June 28, 2026
[9] Atlanta Fed GDPNow, as of August 18, 2026
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