The Federal Reserve faces a tough inflation fight, but it is “unlikely” that effort will backfire into a major setback, thanks to a strong economy that continues to produce growth in employment, wages, and consumer spending, the National Retail Federation (NRF) said Wednesday.
“With changes underway that focus on taming inflation without splintering the economy, the nation’s economic system is in the process of being rebalanced in ways that are testing its resilience,” NRF Chief Economist Jack Kleinhenz said in a release. “This is an extraordinary period with unprecedented factors that include inflation at a 40-year high, uncertainty over the war in Ukraine, supply chain disruptions, and the Federal Reserve raising interest rates. There’s good reason why businesses, consumers, and policymakers alike all feel uneasy.”
The impact of those factors has already been seen in gross domestic product (GDP) trends, which are forecasted to climb just 2.6% this year and another 2.1% in 2023, according to the June issue of NRF’s Monthly Economic Review.
Those growth rates would be far below the GDP’s 5.7% jump in 2021, but the drop is mainly tied to drop tied to international trade balances, inventories, and government spending, the NRF said. In contrast, consumer spending was up a “solid” 3.1% year over year while business investment was up 9.2%, the report found.
“Though many people fear an extreme cooling off of the economy, there is not an overwhelming amount of evidence to support such predictions,” Kleinhenz said. “In general, the data suggests that we remain in an ongoing expansion.”
Other evidence for continue strength includes strong April retail sales numbers as consumers shrugged off rising inflation and stock market volatility. And the Employment Cost Index showed wages rising 5% in the first quarter of 2022 compared with the first quarter of 2021, which was not high enough to keep up with inflation but still the highest reading in nearly two decades, NRF said.
“The Fed has a tricky job on its hands,” Kleinhenz said. “Increased interest rates will mean higher borrowing costs across the economy at the same time higher prices keep eroding the purchasing power of the U.S. consumer. But the central bank needs to act in order to prevent inflation from being baked into the economy and to reduce the risk that expectations of inflation will become unanchored.”