The news: Retail sales grew at a healthy pace in February, buoyed by larger tax refunds and improved weather conditions across much of the US.

• Sales rose 0.6% MoM, the biggest increase in eight months, and 3.5% YoY, per the US Commerce Department.
• 10 of the 13 categories tracked reported YoY gains, with especially notable jumps in auto sales, nonstore retail, and restaurant spending.

Behind the numbers: Bigger refund checks have so far been a major tailwind for discretionary spending. Electronics, home improvement, and apparel retailers have been among the biggest beneficiaries, alongside the travel industry, according to the Bank of America. The funds have also temporarily eased some of the pressures on lower-income households, resulting in a surge of spending on clothing, electronics, and airlines, among other nonessentials.

But that exuberance is likely to fade quickly. From here on out, most consumers are likely to use their tax refunds to offset rising gas and energy costs, which could deal a setback to retailers in discretionary categories counting on a larger bump. Higher gas prices could be especially painful for restaurants, with a $1 increase resulting in as many as six fewer drive-through customers per day, according to a Revenue Management Solutions report cited by UBS analysts.

Implications for retailers: The outlook for retail sales is considerably more complicated than the positive February sales report makes it seem. Many forecasts, including the NRF’s particularly bullish one, expected tax refunds to deliver a larger boost to discretionary spending. We expect retail sales to rise by 3.4% this year, a slight deceleration from 2025. But war in the Middle East is challenging those expectations, introducing yet more uncertainty in what was already a highly volatile retail environment.