March 7, 2024 — The National Retail Federation (NRF) predicts that inflation and the Federal Reserve’s efforts to control it will continue affecting the economy in a major way. According to NRF chief economist Jack Kleinhenz, inflation has dropped from its peak but is slowing less than expected.

In the latest issue of the Monthly Economic Review, NRF shares that January’s 3.1% year-over-year inflation, as measured by the Consumer Price Index (CPI), is an improvement from December’s 3.4% but considerably misses the Fed’s target of 2%. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE), showed inflation at 2.4% in January compared to 2.6% in December.

Kleinhenz described a key issue in the difference between prices for services. According to the CPI, these were up 4.9% year over year in January, compared to commodity-based prices, which were up 0.1% for the same period. Spending is moving back toward services following the pandemic, where Americans spent more on goods while stuck at home. As of the fourth quarter of 2023, 65% of consumer spending was on services, short of 68% in the fourth quarter of 2019 but up from the pandemic low of 63% in April 2021.

Despite a rise in services spending, as prices for services were elevated, overall consumer spending dipped in January due to lower prices for goods and a decline in purchases.

According to Fed chairman Jerome Powell, services like health care, financial services and insurance, restaurants, and transportation—which make up 55% of the PCE—are important factors in measuring inflationary trends. The Fed did not change interest rates in January, stating that it would not be appropriate to reduce rates until it gains greater confidence that inflation is moving toward 2%.