National Retail Federation officials predict the economy will continue to “rush forward” despite the current inflation woes

WASHINGTON DC – The economy’s rapid growth could slow somewhat as the Federal Reserve tries to bring inflation under control over the next few months, but consumers are likely to continue shopping as lower inflation reduces uncertainty, Jack Kleinhenz said, Chief Economist of the National Retail Federation Monday 3 May.

“Fed tightening has triggered a new adjustment cycle and the outlook for interest rates has implications for consumers and businesses alike,” Kleinhenz said. “There is a growing list of uncertainties and risks are mounting. But underlying strength and momentum in both the consumer and corporate sectors should offset a slight slowdown and keep the economy bustling ahead this year.”

While the Fed’s actions could mean higher car and mortgage payments, Kleinhenz said household finances have remained strong despite consumer concerns about inflation and the war in Ukraine. The 4 percent year-on-year increase in retail sales in March showed consumers are willing and able to spend on the back of job growth, wage gains and the wealth amassed during the pandemic, as well as low financial obligations relative to income.

Kleinhenz’s comments came in the May issue of NRF’s Monthly Economic Review, which said inflation should slow in 2022, although it’s still strong, in part because year-on-year comparisons will contrast with already elevated spending in 2021. Also, fiscal and monetary policies from the Fed and other agencies, which along with ongoing pandemic-related supply issues are driving inflation, are nearing their end.

The “first whiff” of the current inflation came in April 2021, when the Bureau of Economic Analysis’s index of personal consumption spending — the Fed’s preferred measure of consumer inflation — rose 3.6 percent from a year earlier, the report said. That was twice what it was in early 2021 and the highest in 13 years. PCE inflation hit 6.6 percent this March, its highest in decades, and the Fed now expects it to end 2022 at 4.3 percent, even if this year’s numbers “beat” last year’s growth.

The Fed is working on two fronts to curb inflation. First, it hiked interest rates by a quarter of a point in March and is expected to slowly raise the federal funds rate to between 2.5 percent and 2.75 percent by 2023 — the highest level since the middle of the Great Recession in 2008. Second, it’s likely to do so this month beginning to reduce its wealth holdings, which have doubled to about $9 trillion during the pandemic. The sell-off of its balance sheet of government and mortgage-backed securities is likely to impact long-term interest rates and reduce the monetary stimulus provided by the Fed.

“The Fed faces a difficult problem,” Kleinhenz said. “Your playbook for monetary tightening can put pressure on demand. However, it has no direct ability to affect the supply side by producing more gas, planting fields with the crops it needs, or making microchips.”

NRF’s full-year guidance projects retail sales to grow 6 percent to 8 percent to $4.86 trillion to $4.95 trillion in 2022.