Inflation drops again as interest rate hikes hit home, NRF says

The country’s retail trade group says it’s still too soon to know if 2023 holds a recession for the economy, but continued hikes in interest rates increase the chances, according to the National Retail Federation (NRF).

While the U.S. Federal Reserve’s interest rate hikes are intended to slow the economy and bring inflation under control, policymakers are always hindered by a delay in seeing the effects of their maneuvers, NRF Chief Economist Jack Kleinhenz said in a release. It can take six months or more for monetary policy to have an impact on gross domestic product (GDP) and 18 months for inflation, according to the January issue of NRF’s Monthly Economic Review. That means that leaders “act knowing they will not see the impact for months and that their action comes at the risk of inducing a recession. There are downside risks both in doing too much and too little, and the Fed is well aware that the balance is delicate,” Kleinhenz said.

The Fed’s measures have been effective to date. The group increased interest rates another one-half percentage point in December even though year-over-year inflation as measured by the Consumer Price Index (CPI) fell to 7.1% in November. That drop in inflation was down from 7.7% in October, marking the fifth consecutive monthly decline after a peak of 9.1% in June. 

That latest interest rate hike was smaller than recent three-quarter-point increases but still took rates to their highest level in 15 years and showed “the battle against inflation is still at hand,” the report said. Even though inflation has fallen, “it remains in the pipeline and is not going away. Americans are still out spending” – fueled by growing jobs and wages, built-up savings, and careful use of credit – and healthy 2022 holiday sales showed “while consumers don’t like higher prices, they are able and willing to pay them.”

Altogether, that means that 2023 begins with the possibility of easing inflation but also with uncertainty, NRF said. “There is no easy fix for inflation, and the Fed’s job of trying to bring down rising prices without damaging the labor market or the rest of the economy is not enviable,” Kleinhenz said. “It isn’t impossible to sidestep a recession, but when the economy slows it becomes very fragile and the risk rises significantly. If a recession is in the cards, it will likely be rising interest rates that set it off.”

NRF’s report follows forecasts from several other industry groups that are carefully tracking the economy. Last month, the industrial real estate firm CBRE predicted a “moderate recession” in 2023 for warehouse real estate. The firm said that event could hit home prices, retail sales, and unemployment, but that business would bounce back as inflation recedes by the end of 2023.

Despite the various predictions, there may never be a final word on whether a recession ever occurs. The Wisconsin private equity firm Baird says the textbook definition of recession is two consecutive quarters of negative real (inflation-adjusted) GDP. But ever since 1920, the National Bureau of Economic Research (NBER) has used a much broader brush, saying a recession is “a significant decline in activity spread across the economy, lasting more than a few months.”

In any case, economic indicators across the logistics spectrum show that growth is already slowing down and businesses are hunkering down for a quiet period. Those signals include reports from BlueGrace Logistics, the monthly Logistics Manager’s Index (LMI), the Port of Oakland, and the freight transportation forecasting firm FTR.