Consumer demand 'is still building' despite surging inflation: Former Toys 'R' Us CEO

Retail sales jumped 3.8% in January

Storch Advisors CEO and former Toys 'R' Us CEO Gerald Storch argued on Tuesday that consumer demand "is still building" despite surging inflation.

On "Mornings with Maria," Tuesday, Storch argued that, in the short term, the trend is going to continue - especially since "consumers are spending" and "retailers are buying like it’s never going to end."

"But at some point, this thing comes down to Earth and when it does, the only way it ends is badly," he went on to warn.  

U.S. consumers accelerated their retail spending in January as COVID-19 cases eased nationwide, even as they confronted the hottest inflation in four decades.

Retail sales, a measure of how much consumers spent on a basket of goods ranging from cars to food and gasoline, rose 3.8% from the prior month, the Commerce Department said last Wednesday. Economists surveyed by Refinitiv expected sales to rise 2%; it marked a sharp rebound from December, when sales unexpectedly dropped 2.5%. 

The data came as consumers face the worst inflation spike in 40 years: The government reported earlier this month that the consumer price index climbed 0.6% in January, bringing the year-over-year gain to 7.5%, the highest since June 1982. Wholesale prices also increased, rising 1% in January and 9.7% over a 12-month period.

Storch noted that the data shows "that consumer demand is building," which he argued is "driven by unprecedented government payments" and "liquidity from the Fed." 

"People have a lot of money, and they are going to spend it until it stops," he continued. 

Storch subsequently pointed out that "the Fed is going to try to change things" to curb inflation. 

"So they are going to start tightening, raising rates, buying back bonds; the question is, can they get it right?" he posited.

INFLATION PROBABLY COSTING MOST AMERICANS AN EXTRA $276 A MONTH 

The Federal Reserve late last month signaled it could "soon" raise interest rates for the first time in three years, paving the way for a March liftoff as policymakers seek to keep prices under control and combat the hottest inflation in nearly four decades. 

Storch predicted that consumers will continue to spend for at least the next six months, but warned that "eventually this won’t work anymore."

He noted that "more money is going to gas" and argued that "there is no doubt, as oil approaches $100 a barrel, that’s going to happen." 

A gallon of gas, on average, cost $3.53 nationwide on Tuesday, according to AAA – up from $2.64 a year ago. In California, the average gas prices are nearly $5 per gallon. Prices are expected to climb higher as the country enters peak travel season and as heightened tensions between Russia and Ukraine threaten to further rattle the market.  

Storch also noted that, as more money goes to food amid surging inflation, "there’s less money for other things." 

Price increases in January were widespread: Although energy prices rose just 0.9% last month from the previous month, they're still up 27% from last year. Gasoline, on average, costs 40% than it did last year. Food prices have also climbed 7% higher over the year.

Ticker Security Last Change Change %
M MACY'S INC. 18.66 -0.73 -3.79%
HD THE HOME DEPOT INC. 273.35 +3.06 +1.13%

Storch's analysis comes on the heels of retailers Home Depot and Macy’s reporting their quarterly earnings, surpassing analyst expectations for both revenue and profit. 

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"All these companies can do is project forward what has happened so far," Storch told host Maria Bartiromo, noting that "in retail, we say ‘trend is your friend’ so they’re [retailers are] thinking it will keep going, and I think it will for quite some time."

"When I say ‘end badly’ eventually, as you tighten, tighten, tighten to bring inflation down - the whole purpose is to decrease this consumption, this excess liquidity - and as you do that, these numbers have to come down," he concluded.

FOX Business’ Megan Henney contributed to this report.