Russia’s invasion of Ukraine in late February precipitated a large downgrade to our forecast due to higher inflation expectations, more aggressive tightening of monetary policy, and erosion of consumer purchasing power. These concerns have not diminished as the war in Eastern Europe intensifies. Prices for energy, agricultural commodities, and metals have spiked as a result of the invasion and we expect that the situation may become more dire in Q2 2022—a sentiment also expressed by consumers.

The impact of rising prices, coupled with interest rates hikes, is expected to further curb consumer spending in 2022. In April, one out of every two consumers said they were buying cheaper products to help offset the impact of inflation. Moreover, discretionary spending for out-of-home entertainment and travel, hard hit during the pandemic, may see some softening in the coming months as consumers intend to spend less to help offset price increase. Moreover, geopolitical events caused energy prices to soar—especially at the gas pump—and consumers reacted by driving less often. This situation could be exacerbated if the European Union decides to ban the import of Russian oil potentially driving gas prices up further.

 A special poll conducted in the April Consumer Confidence Survey® examined the impact of higher prices and interest rates (first and second charts below), as well as when consumers expect inflationary pressures will begin subsiding (third chart). 

Interest rates have also played a key role in recent spending decisions. Two out of every five consumers said they delayed making a big-ticket item purchase. Additional—and more aggressive—rate hikes are likely to continue to dampen purchases of consumer durables over the coming months. Moreover, the shift in spending from durables to services continues, with waning of the Omicron wave further adding to the recent softening in durables.

Lastly, 28 percent of consumers anticipate a high inflationary environment will persist into 2023, with an equal share expecting this to be more permanent in nature. Thus, we can expect consumer spending to remain rather tepid for the reminder of the year.

Looking forward, The Conference Board projects US GDP will grow at a positive but notably slower rate in 2022 from the 5.6-percent pace of 2021. There remain serious downside risks to the growth outlook, including the possible intensification of supply chain disruptions and inflation linked to lingering pandemic shutdowns and the war, as well as the impact of tightening monetary policy and persistent labor shortages.