Consumers continue to worry about high inflation and the Federal Reserve interest rate hikes intended to bring inflation down, but neither has stopped them from spending, according to the National Retail Federation Chief Economist Jack Kleinhenz.

“The economic situation in the United States is unsettling,” Kleinhenz said. “Consumer confidence is down, consumer spending’s rate of growth has slowed, and economists and consumers alike are worried about the possibility of a recession, all reflecting persistently high inflation and rising interest rates. Nonetheless, spending continues to grow, and many economists say a recession, if there is one, will likely be mild.”

“Consumers have become cautious, but they have not stopped spending,” Kleinhenz said. “Growth is not as high as last year, but households continue to spend each month as more jobs, wage growth and savings backstop their finances and help them confront higher prices.”

Kleinhenz’s remarks came in the October issue of NRF’s Monthly Economic Review, which noted that consumer spending held up better than expected in August as overall retail sales reported by the Census Bureau grew 0.3 percent from July and 9.1 percent year-over-year. 

Year-over-year increases in retail sales have been mainly in the upper single-digits since spring, not as high as the double-digits seen last year into early 2022, but still healthy.

The Federal Reserve, which had kept interest rates low over the past two years to counter the impact of the pandemic, increased rates another three-quarters of a percentage point in September, bringing its current rate to between 3 percent and 3.25 percent. The Central Bank plans to continue increases until inflation, which was at 8.3 percent in August, lowers to about 2 percent.

Higher interest rates have driven up the cost of carrying credit card balances or financing a home or car, and the combination of inflation and interest rates worries have consumer confidence at its lowest levels in years despite an uptick in September, noted the NRF.  

Consumers are more optimistic, expecting inflation to be at 5.7 percent a year from now, according to an August survey by the Federal Reserve Bank of New York, down from 6.2 percent expected a month earlier. 

Consumers expect inflation to be at 2.8 percent three years from now rather than their earlier expectation of 3.2 percent and 2 percent in five years.

Gross domestic product declined 1.6 percent year over year in the first quarter and 0.6 percent in the second quarter, sparking fears since two consecutive quarterly declines in GDP, not the official definition, typically mark a recession. But the Blue Chip Economic Indicators panel of business economists, including Kleinhenz, forecasts 1.2 percent growth in the just-ended third quarter and 0.6 percent in the fourth quarter continuing into 2023.

Only 38 percent of Blue Chip economists believe the Fed can rein in inflation without triggering a recession, down from 51 percent in August, but 95 percent said a recession would likely be mild. 

The economists see a 42 percent chance that a recession will begin this year and a 54 percent chance that it will begin in 2023.