After the wrenching, pandemic-induced stop of 2020 and the strong economic bounceback in 2021, there were hopes that this year would mark the return to something like moderation, a kind of normalcy.
Those hopes didn’t make it into the spring — and they might have been a little pie in the sky anyway.
Coming into 2022, retailers were coping with pandemic induced supply chain back ups that, yes, drove prices up but were seen by many experts as a passing effect of the pandemic.
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Just how rosy that view was is a matter of debate, but when Russian President Vladimir Putin invaded Ukraine in February, hopes of any kind of normalcy faded with the reality of a land war in Europe.
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The ongoing war has proven to be a human and geopolitical nightmare that pushed a still-fragile global economy toward the edge. Both food and fuel prices spiked as Russia and the Ukraine, backed by the West, squared off.
The inflation that was supposed to be transitory started to hit hard — and was made all the worse by the lingering supply chain back ups and the decision by many retailers to stock up after leaving money on the table last Christmas.
The U.S. Consumer Price Index started the year with a 7.5 percent increase in January and peaked at 9.1 percent in June — levels not seen since Ronald Regan was president. Inflation in Europe surged even higher, topping 10 percent in the U.K. and some countries of the European Union.
While American shoppers still spent at first, flush from fiscal stimulus and a strong job market, some started to give way by midyear and, not surprisingly, it was Walmart Inc. and Target Corp. feeling the push back first.
“U.S. inflation being this high and moving so quickly, both in food and general merchandise, is unusual,” said Doug McMillon, Walmart’s chief executive officer, in May. “We’ll control what we can control, reduce our inventory level and keep prices as low as we can, especially on opening price point food items, while improving our profit performance. Inflation is playing a role in the top and bottom line and the pace of change created a timing issue for us.”
The summer became something of a waiting game with merchants catering to lower end consumers scrambling while mid- to higher-end shoppers kept spending. This was especially true in the luxury sector, where Americans flocked to Europe as if it were their backyard — spending freely thanks to a dollar that at one point almost reached parity with the pound and the euro.
Big spenders went on spending, but middle class shoppers and those considered affluent, but not wealthy, started pulling back in October, around the time heavy hitters on Wall Street started warning of harder times ahead.
Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., said U.S. consumers and businesses were actually holding up pretty well in the fall, but it was his note of caution that drew attention.
“Consumers have money,” Dimon said. “Fiscal stimulus, they still have more than they had before. They’re spending 10 percent more than last year, 35 percent more than pre-COVID-19. Their balance sheets are in great shape…even if we go into recession, they’re going to be in better shape than in ‘08 and ‘09. Companies are in good shape.
“But you can’t talk about the economy without talking about the stuff in the future,” he said. “And this is serious stuff. This is inflation…it’s rates going up…it’s the war. These are very serious things, which I think are likely to push the U.S. and the world. I mean Europe is already in recession; they’re likely to put the U.S. in some kind of recession six to nine months from now.”
Since Dimon — and many others — started warning of harder times and more consumers saw those harder times in their own lives and weekly spending, the threat of recession has hung over the market.
In November, food prices in the U.S. were up 10.6 percent from a year earlier, while energy prices were up 13.1 percent, including a 65.7 percent gain in fuel oil. Apparel prices rose, too, but with a much milder 3.6 percent gain.
That pressure no doubt contributed to a weaker than expected showing for retail sales in November.
Total retail and food service sales fell a seaonally adjusted 0.6 percent last month, compared with October, as the year-over-year gain came in at 6.5 percent.
Apparel and accessories specialty chains saw sales fall 0.2 percent from October and inch up just 0.7 percent from a year earlier, while department stores were down 2.9 percent from October and 3 percent from a year earlier.
It’s a retail market where even winning could feel like losing.
While the National Retail Federation is projecting a holiday sales gain of 6 percent to 8 percent this year, inflation — although down — was still running at 7.1 percent in November, according to the Labor Department’s Consumer Price Index. European inflation also slipped but was still in double digits.
That has price increases effectively eating Christmas.
And the psychology of spending is starting to change, at least in the U.S.
A study last month by Joanne Hsu, director of the University of Michigan’s Surveys of Consumers, said a year and half of high inflation “has shaped consumer views toward their finances as well as the economy, contributing to the all-time low recording of sentiment this summer.”
“Throughout 2022, consumers have expressed how inflation has eroded their living standards, closely tracking the proliferation of negative news they hear about inflation,” Hsu said. “We can now see the effects on behavior as well: a majority of consumers have adjusted to their expectation of continued inflation by adjusting their spending. Moreover, an even larger share of consumers are planning spending cuts in the year ahead. Their attitudes toward [drawing down savings] and borrowing suggest that this future spending response may be amplified as consumers draw down their savings.”
The Federal Reserve, led by chair Jerome Powell, has been ratcheting up interest rates to bring inflation down — which means cooling off the economy with a weaker job market and less spending, but that is still seen as better than letting price increases run wild as they can take on a life of their own.
Last week, Powell said, “We are taking forceful steps to moderate demand so that it comes into better alignment with supply… Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions… We will stay the course, until the job is done.”
Powell described how consumer spending has slowed as real disposable income sank, how the housing market weakened significantly and how higher interest rates are weighing on business investment.
But the labor market has held on, which means the Fed has more work to do if it’s going to really tamp down inflation. European central banks, meanwhile, face a similar quandary and last week all of them boosted rates in line with the Fed’s move to do so. While observers a year ago were talking about interest rates of 1.5 to 2 percent, now some are wondering whether global rates could go as high as 6 or 7 percent before inflation is tamed.
“Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated,” Powell said. “Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last three months. Although job vacancies have moved below their highs and the pace of job gains has slowed from earlier in the year, the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers.”
A strong job market usually has retailers turning cartwheels because people who have jobs spend, but right now it means even higher interest rates for longer.
Wall Street has felt every bump along the way, with the Dow Jones Industrial Average trading down about 9 percent for the year going into the last week before Christmas.
Retailers might wonder what happened to a year that started out so brightly in 2022. But they face even darker clouds in 2023.