Rising prices for such staples as food and energy are finally taking a toll on the US consumer.
While retail sales for March were slightly higher than expected, it was because consumers paid more for necessities like gasoline and food, and not because they bought more discretionary items, analysts said.
Inflation, in essence, may be bringing an end to the consumer spending boom, the main engine of US economic growth for the past several years.
David Rosenberg, North American economist at Merrill Lynch, said on Monday that the 64-quarter-old consumer spending spree did, in fact, end in the first quarter of this year.
"The retrenchment has been broadly based across hotels, clothing, autos, airlines, jewelry, appliances, restaurants, sporting goods, casinos and home improvement," Rosenberg said in a report.
Just how bad inflation has gotten will be evident in two government reports this week.
On Tuesday, the March producer price index--which measures inflation at the wholesale level--is expected to show a 0.6% increase, mainly because of food and energy costs. And on Wednesday, the March consumer price index--the main inflation measure--is expected to post a 0.4% gain. Excluding food and energy, the CPI is expected to have risen 0.2%.
Because of inflation, Americans are not shopping the way they used to, according to Bespoke Investment Group, a research firm in Harrison, N.Y.
They're digging deeper into their wallets for the bare necessities like gasoline, food and beverages, the sectors showing the most growth in retail sales, the firm said. That trend has been building over the last several months,
"Unfortunately, growth in these sectors is primarily due to inflation in food and energy prices," Bespoke's Paul Hickey and Justin Walters said.
The sectors selling discretionary items, like motor vehicles, building materials, general merchandise and clothing, showed the largest contraction of total share in retail spending, they said.
Not surprisingly, consumer confidence is now at its lowest level in more than a quarter century, fueled by worries over inflation and jobs, the Reuters/University of Michigan Surveys of Consumers showed Friday.
Prices are surging at a time when U.S. home prices continue to fall and the labor market shows signs of softening.
Federal Reserve Chairman Ben Bernanke said as much earlier this year, acknowledging that the central bank's job is even more difficult, especially compared with the last recession in 2001, when the tech-stock bubble burst and investment declined.
"In this case, the consumer is taking the brunt of the effects" of the current downturn because housing wealth has been tied strongly to spending and Americans' homes are their biggest assets, Bernanke said.
Investors are wary that signs of rising inflation could throw a wrench in any Federal Reserve plans to continue to aggressively cut interest rates.
"If we see no relief in inflation, it does make it more difficult for the Fed to cut rates and to stimulate the economy," said Jim DeMasi, chief fixed income strategist at Stifel, Nicolaus & Co.