First quarter showed inflation challenges

WASHINGTON DC - The slow but continuing growth of gross domestic product (GDP) and other economic indicators in the first quarter shows the difficulty in bringing inflation under the control. National Retail Federation Chief Economicist Jack Kleinhenz stated May 9 in NRF's May issue.

Monthly Economic Review


The World Health Organization has declared that the pandemic was over and the U.S. Government has ended the declaration of an emergency in public health. Kleinhenz stated that the COVID-19-related economic challenges are not over. The Federal Reserve has raised interest rates to try and control inflation. The Federal Reserve has not yet achieved its goal. Results from the first quarter indicate that taming the inflation without tipping America into recession is a daunting challenge.

Kleinhenz stated that the U.S. Economy remained "in gear" during the first three months of the year, despite the fact that GDP growth was a modest 1.1% annual rate compared to the 3 percent average in the two previous quarters. This number could have increased by more than two percentages points, but businesses chose to reduce their stockpiles rather than produce or buy more goods. Consumer spending, which makes up two-thirds the GDP, increased by 6.5 percent. This is a significant increase from the 0.1 percent growth in the previous quarter.

Kleinhenz stated that a slowdown in the GDP would normally be viewed as a negative but is crucial in controlling inflation in this context. The economic data does not support a recession.

Employment Cost Index shows that growth in wages and salaries in private manufacturing fell to 4.9 percent from 5.1 percent in the previous quarter, but still remained higher than the 3.5 rate required to meet the Fed's target of 2 percent inflation. The employment numbers for the second quarter were better than expected, despite the high interest rate. A net gain of 253,000 jobs, an increase in wages of 4.4 per cent over the previous year, and a low unemployment rate of 3.4% tied January's record.

The Personal Consumption Expenditures Price Index – the Fed’s preferred measure – showed 4.9 percent inflation year-over-year in the first three months. This was down from the 5.7 percent recorded in the fourth-quarter and well below the 6.4 per cent seen a year ago. The core PCE Index, which excludes volatile energy and food prices, was 4.7 percent.

In the face of these numbers, last week the Fed raised interest rates by another quarter point to a maximum limit of 5.25 percent. Jerome Powell, chairman of the Federal Open Market Committee at the Fed, said that sentiment among the committee members favors a temporary pause in rate increases. However the panel has not committed to a decision yet. Kleinhenz said that the Fed's ability to know when it is time to stop increasing rates, and how quickly afterward they will begin to decrease them, are the most important questions.

The Fed announced the increase and said that tighter credit conditions will likely 'weigh' on economic activity.

It is important to find a way of managing or controlling the uncertainty.