Commercial brokerage firm Cushman & Wakefield has taken a deep dive into the troubling topic of inflation and has come to some very interesting conclusions about the reasons behind its rise and how long and deep its impact will be on the U.S. economy.
The recently released Cushman report authored by Senior Economist James Bohnaker and Head of Economic Analysis & Forecasting Rebecca Rockey contends that while U.S. inflation is at its highest level in 40 years, it has not yet had a material impact on overall consumer spending.
In fact, they point to supply chain disruptions, the reopening of the economy from COVID and higher energy prices as the cause for two-thirds of the current inflation rate.
The report notes that an inflation rate of around 2% in the U.S. is considered the “sweet spot.” The high-inflation situation we are currently experiencing suggests that the economy is too “hot” for production to keep up, leading to a scarcity of goods and services. As of January, inflation as measured by the Consumer Price Index (CPI) was running at 7.5% on a year-over-year basis, the highest rate in 40 years.
Some of the key takeaways from the report include:
• The outlook for consumer spending remains positive, although inflation is a risk that bears watching.
• The composition of spending will continue to normalize as Americans unleash pent-up demand for travel, entertainment, and other social consumption. Demand growth for durable goods will slow, in part, due to higher interest rates.
• Retail leasing demand will continue to improve, thanks to fundamental strength in sectors that are less sensitive to inflation, such as quick-service food, discount apparel and dollar stores.
One key area that must improve in 2022 is the labor market. Cushman believes that the most crucial element for the economy to improve this year “is that the labor market continues to heal. Job and wage growth are the most enduring drivers of spending, and right now both are on fire. Amid labor shortages across many industries, we have seen a record number of people quitting jobs due to a general optimism about finding higher-paying jobs with better benefits. As a result, annual wage growth of 4.5% as measured by the Employment Cost Index (ECI) is the highest it has been in more than 20 years. While this is not enough to keep up with the current rate of inflation, this relationship is expected to reverse later this year, which will allow most Americans to enjoy ‘real’ wage growth.”
In terms of their economic predictions and inflation’s impact on spending, they note that the Federal Reserve’s intent to raise rates this year should have an impact.
“We estimate that nearly two-thirds of the currently observed inflation is tied specifically to disruptions caused by the pandemic, the reopening process and energy. By that logic, inflation should gradually subside along with the virus’s influence: a consensus panel of economists expect annual growth in the CPI to decelerate from 6.7% in 2021 to 3.6% by the final quarter of this year and to 2.4% in 2023 Q4.”
Later, the report also predicts that consumer spending will grow despite higher rates. “Even after accounting for expectations of higher interest rates and elevated inflation, consumer spending is expected to grow by 3.9% in 2022 under our baseline forecast. Barring last year’s growth of 7.9%—when the economy was clawing out of a severe downturn—this increase would be the strongest since 2000. Spending in sectors that rely on financing—such as motor vehicles, homebuying and appliances—is likely to decelerate more than in service sectors, which were already poised for an accelerating recovery as the pandemic effects recede. Better balance in the composition of consumer spending will further help inflation normalize.”
The report concludes: “If inflation proves to be stubbornly high for an extended period, it may deter spending at mid-priced apparel brands, department stores, and fine dining restaurants as consumers are forced to spend more on necessities and discount items. That said, we have yet to see material evidence of this, and the opposing force of pent-up demand may be strong enough to outweigh price concerns. Consumers are eager to get back into the shops and restaurants that were off limits for so long.”
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