On the surface, May was a great month for retail sales. Growth in overall retail spending accelerated to 5.2 per cent – the fastest growth rate in over a year and comfortably above last month’s 4.5 per cent advance.

Unfortunately, a lot of this was driven by inflation, which is exerting a tighter grip on retail. This is especially true for fuel prices, which have driven gas station sales up by a dramatic 25.4 per cent. This is the most elevated level of growth since the big inflation spike of summer 2022.

The extent of this impact on the overall growth rate should not be underestimated. If gas station sales are removed from the overall sales numbers, growth drops to a still respectable, but much lower, 3.7 per cent.

In May, consumers spent $16.8 billion more on gas than they did last year. Generally, this is not spending people particularly enjoy, so it contributes to a sense of constraint on household budgets and squeezes the money available for other discretionary things.

Thankfully, May did have some offsets from the benefits of higher tax refunds, which are still filtering through and helped core retail sales to grow by 4.5 per cent. However, constraint is visible in some of the underlying metrics. Core retail volumes in May were up by just 0.2 per cent – a sharp decline from last month’s 1.2 per cent volume uplift.

We have also seen a modest slowdown in discretionary spending, which has pulled down growth in categories such as apparel and foodservice. Some of this isn’t visible in the headline numbers, as they include inflation, but in volume terms, it is very evident that people are becoming a bit more cautious in their spending.

The worry is that as the benefits of tax refunds fade, this compression will show through even more. However, if the end of the war with Iran brings down gas prices, there is a glimmer of hope that inflation will taper off towards the end of the year, bringing relief to households.

On a segment basis, sales at apparel stores grew by 3.6 per cent, although they were down 0.5 per cent in volume terms. Interestingly, we are seeing more of a cutback on basics – where consumers are trading down or delaying purchases to save money – and some modest expansion in added-value merchandise that shoppers want to buy to treat themselves.

Among food retailers, sales grew by a modest 1.5 per cent, while underlying volumes were down 0.7 per cent. Inflation is affecting food supply chains, but a highly competitive market is helping keep shelf-edge prices in check. However, from our data, food remains an area where consumers are very uncomfortable with their levels of spending, and this continues to color habits in terms of shopping around and visiting value chains more.

The home sector is a mixed bag. Some of the bigger-ticket categories remain in the doldrums because of a weaker housing market and high interest rates, which deter people from taking out loans. However, less expensive categories – like home decor – are advancing comfortably. Electronics continued to grow, largely due to ongoing tax refunds.

Looking ahead, retail will face tougher prior-year numbers in June and July. At the same time, the consumer will start to see household finances tighten. However, it is important to recognize that this doesn’t necessarily equate to a hard landing for retail. There are plenty of non-retail areas where consumers can cut back, and big occasions like the summer of sport and America 250 are likely to fuel some spending exuberance.

Even so, as we round out the first half of the year, the second period might be somewhat more challenging for generating growth.