Retailers may not get the boost they are looking for after reports surfaced that consumer spending increases were offset by higher prices. Inflation-adjusted consumer spending declined 0.2% in June, according to the Commerce Department. This means that companies like Wal-Mart Stores (NYSE: WMT) and Target Corporation (NYSE: TGT) may not have realized the benefits of the tax rebates, which have instead flowed into the hands of mining and energy companies behind the higher costs.

Inflation rose 0.8% this month, which is the largest increases since February 1981's reading of 1 percent. The problem the government now is that its tax rebate program is failing and the Fed may be forced to raise rates, which could further erode the credit problems in the U.S. The Fed is expected to keep rates unchanged, but pressure by the government to make the rebate programs work may force them to hike rates at least a little to ease inflation.

Retailers are now left between a rock and a hard place. A rise in interest rates would likely reduce consumer spending in the long-run because loans would be more expensive. However, it would enable them to enhance their profit margins since the cost of goods would presumably move lower. However, if interest rates do not rise, inflation will remain a pressure on margins and consumer spending may take awhile to turn around. In the end, it may be awhile before retailers recover.

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Target Corporation (TGT)
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