US retail sales are rising in the latest sign that the Federal Reserve may need to keep interest rates high

US retail sales rose sharply in January, the latest in a string of hotter-than-expected economic data that could force the Federal Reserve to tighten longer to slow the American economy.

Retail sales, which include spending on groceries and fuel, rose 3 percent last month from December levels, the Census Bureau said on Wednesday. Economists were expecting an increase of 1.8 percent.

The data, which showed signs that American consumers have not reduced spending on consumer goods despite high inflation, came a day after the US Labor Department released inflation figures that showed price pressures were easing as much as they had been late last year.

It also follows a Labor Department report on nonfarm payrolls that showed new hires nearly doubled in January, with the US economy adding more than half a million jobs for the month – up from 223,000 in December.

Fed Chairman Jay Powell has repeatedly warned that the central bank must keep interest rates high to fight inflation: the consumer price index rose 6.4 percent in January from a year earlier.

But in recent months, financial markets have signaled that investors believe the Fed will be able to take its foot off the brakes by the end of 2023 on the back of rapidly weakening price data.

However, the flurry of strong data in February has prompted a reversal in market sentiment. On Wednesday morning, interest rate-sensitive two-year government bond yields rose to their highest level since early November, but then partially reversed that move.

The US dollar index, which measures the greenback against a basket of six currencies, rose to its highest level since early January. US stocks fell slightly, with the blue-chip S&P 500 down 0.5 percent and the tech-heavy Nasdaq down 0.4 percent.

Wednesday’s retail sales report showed that higher borrowing costs, spurred by the Fed’s aggressive year-long campaign to raise interest rates, and persistent inflation have yet to stop Americans from shopping.

The January reading pointed to a strong rebound from the holiday month, which had seen the biggest monthly fall in retail sales since December 2021. The figures are not adjusted for inflation.

Spending at gas stations was flat since December but was still 5.7 percent higher than a year ago, even as prices at the pump have eased.

The so-called retail control panel, which excludes building materials, auto parts and gas station sales, rose 1.7 percent, beating economists’ expectations with a 0.8 percent gain.

Additional reporting by Kate Duguid in New York US retail sales are rising in the latest sign that the Federal Reserve may need to keep interest rates high

Adam Bradshaw

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