Inflation isn’t going away, but Americans are still spending: NRF

Even though inflation has fallen, “it remains in the pipeline and is not going away,” stated the National Retail Federation’s (NRF) Monthly Economic Review. Yet, “Americans are still out spending” fuelled by growing jobs and wages, built-up savings and careful use of credit. “Healthy” 2022 holiday sales indicate “while consumers don’t like higher prices, they are able and willing to pay them.”

Final holiday spending data won’t be available until January 18, 2023 but November sales as calculated by NRF increased 5.6% year over year, putting the season on track to meet NRF’s forecast of 6% to 8% growth over 2021. After a 2.6% year-over-year increase in the third quarter, GDP was growing at a 2.7% rate in late December, according to the Federal Reserve Bank of Atlanta’s GDPNow real-time tracker.

“This year starts with the possibility of easing inflation but also uncertainty,” said NRF Chief Economist Jack Kleinhenz while referring to the interest rate hikes. “There is no easy fix for inflation, and the Fed’s job of trying to bring down rising prices without damaging the labour market or the rest of the economy is not enviable.”

While the Federal Reserve’s interest rate hikes are intended to slow the economy and bring inflation under control, it can take six months or more for monetary policy to have an impact on GDP and 18 months for inflation, the report stated. That means policymakers “act knowing they will not see the impact for months and that their action comes at the risk of inducing a recession.”

“It isn’t impossible to sidestep a recession, but when the economy slows it becomes very fragile and the risk rises significantly,” Kleinhenz added. “If a recession is in the cards, it will likely be rising interest rates that set it off.”

It’s too soon to say whether the Federal Reserve’s efforts to reduce inflation will lead to a recession, but continuing interest rate hikes increase the chances, he said.

“There are downside risks both in doing too much and too little, and the Fed is well aware that the balance is delicate.”