January’s National Retail Federation’s (NRF) Monthly Economic Review noted the economic effects of the COVID-19 omicron variant. The variant will bring uncertainty to the economy in 2022 and could contribute to inflation, but is unlikely to cause widespread shutdowns or slowdowns, NRF Chief Economist Jack Kleinhenz said.
“Even with the experience of the past two years, there is no model that can predict how the economy responds to a pandemic,” Kleinhenz said. “What we have learned is that each successive variant has slowed down the economy but that the degree of slowdown has been less.”
“While omicron is highly transmissible, its effects can be relatively mild for those who are fully vaccinated and broad-based lockdowns are not expected,” Kleinhenz said. “Little is certain about omicron’s impact on consumer demand, but people who stay at home because of the variant are more likely to spend their money on retail goods rather than services like dining out or in-person entertainment. That would put further pressure on inflation since supply chains are already overloaded across the globe.”
The NRF report said 2022 is likely to be “another very challenging year of substantial uncertainty” and that questions to be answered include whether the pandemic is near its end, whether supply chain issues will be resolved, how high inflation will go and how long it will last.
Inflation, which was driven by shortages of goods as COVID-19 shut down factories and snarled supply chains while government stimulus fueled consumer spending, is likely to continue in 2022, but should eventually slow.
“Inflation started gradually and then came on strong, but clearly heated up during 2021 and has become a formidable factor facing the economy and especially consumers,” Kleinhenz said. “What is ironic is that the monetary and fiscal policy that pulled the economy out of the recession has prompted unprecedented growth that is now undermined by accelerating prices.”
Worries about inflation can become a self-fulfilling prophecy, especially as workers seeing higher prices for everyday products like groceries may demand higher wages that force employers to increase prices, Kleinhenz said. Inflation as measured by the federal Personal Consumption Index was up 5.7% in November, the highest in nearly 40 years, and a Federal Reserve Bank of New York survey shows consumers expect inflation to grow 6% over the next year. But the same consumers expect only 4% inflation over the next three years as price increases slow. With the Fed planning multiple interest rate increases this year, consumers will be encouraged to save money, helping cool off inflation.
Even with inflation, consumer wealth grew 18.1% year over year in the third quarter of 2021 and consumers “have never been as wealthy as they are today,” Kleinhenz said. While government stimulus programs prompted by the pandemic are “in the rearview mirror,” job growth and wage gains amid the current labor shortage are continuing to drive consumer income and spending.
“If there is one lesson we have learned, it is not to underestimate the resilience of the consumer and, therefore, the U.S. economy,” Kleinhenz said. “Fortunately, we have a lot of tailwind in terms of job growth, spending and production as we turn the calendar to 2022.”