Year-on-year retail sales are forecasted to grow, albeit with a tight squeeze on consumer spending because of the rising inflation rates in Europe and North America. Fears are mounting every day about the effect of the conflict in Eastern Europe on economies around the world—how will this pan out in the coming days?
Ukraine and Russia are important food and energy sources to the rest of the world. Russia alone accounts for over 30 percent of European energy needs. The conflict is debilitating to the world’s economy, which is still reeling from the impacts of COVID-19.
Projections are clear that the U.S. will see higher retail sales in 2022 than last year. In a year stark with many events—the Ukrainian war and a mounting interest rate rise—this is an impressive projection so far. However, the figures presented have a few hidden twists—inflation props them up, making them sinister, unlike in previous years.
The service sector will witness the highest growth in spending, away from goods. Further, the fuel to increase spending will peg on the ability of more companies to bring in more people to work—a situation that can also cut the inflation rates in the long term.
How Does Inflation Affect UK Spending Habits?
The UK’s economic outlook is a mixed bag so far, with some industries surging because of the sped-up abandoning of Covid-19 restrictions in late 2021 and early 2022. The stock market, for example, has maintained a steady figure of between 7000 and 7500 points. At the start of the pandemic, around February and March 2020, it dropped below 5000.
The acceleration in rebound is a pointer to confidence in the market and increased spending by consumers to prop up the falling stocks. Amid Covid-19, the government-backed furlough scheme and grants provided to businesses also by the government stabilized retail sales. Employment rates are below 4% for the first time in two years, people have more money to spend—explaining the rise in retail sales.
Inflation and Spending
Lower commodity prices encourage spending, growing the economy. However, with situations such as the conflict in Eastern Europe, rising energy prices, and falling labor market, prices have skyrocketed to record levels. The situation is not unique to the UK, but in most of Europe and North America. Higher commodity prices have pushed the average home spending to the brink, with more money now focusing on essential services.
Impact of Consumer Spending on Stocks
In 2024 or 2023, the inflation rates might return to about 2 percent or lower. However, before these positive adjustments, projections are that the rate might hit 8 percent later in 2022. The Bank of England has adjusted the interest rates to help curb inflation. The adjustments are a clear defender to inflation rates of beyond 10 percent later this year that might push consumers further to the brink of poverty.
However, a higher trajectory of interest rates by Central Banks is also a limiter to the growth of stock markets, as it increases the cost of borrowing. Such a move is a deterrence to small and medium enterprises’ growth, as they might not pay debts or borrow new money to satisfy the supply chains or take in new workers. Increased interest rates also affect financial stocks—a situation that might affect real estate in the short term before markets adjust to the new reality.
However, the Bank of England took a gradual approach to increasing interest rates, which have a long-term impact and not a one-night effect on the economy. Probably, by the time the interest rates take a complete hold on the markets, oil prices will have adjusted, and the western economies will have found an alternative supply of energy.
Conclusion
Inflation and retail spending have an intricate relation in that an increase in one affects the other. However, the easing of restrictions and the increased vigor to spend will have a bearing on the markets, albeit, the conflict in Eastern Europe. The markets will adjust with the new realities, and in the long term, a calm will restore the inflation rates to pre-covid times.