Consumer spending played a major role in economic expansion in the first half of the year, but year-over-year spending growth slipped from 4.2% in the first quarter to 1.6% in the second, the National Retail Federation reports.

“Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services,” says NRF Chief Economist Jack Kleinhenz.

“While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available,” he adds.

Retail sales as calculated by NRF – which exclude automobile dealers, gasoline stations and restaurants – were up 3.1% unadjusted year over year in the second quarter. Those numbers kept up with inflation but were below the 4% growth that was registered for the first six months of the year.

The Personal Consumption Expenditures Price Index – the Federal Reserve’s preferred measure of inflation – was at 3.7% year over year in the second quarter, Kleinhenz points out.

That was down from 4.9% in the first quarter but still far above the Fed’s target of 2%. The Fed responded by raising rates another quarter-point last month to a range between 5.25% and 5.5%, the highest level since January 2021.

The GDP grew at a 2.4% annual rate adjusted for inflation in the second quarter, up from 2% in the first quarter but in line with 2.1% for all of 2022 and far below the 6% seen in 2021. While the Fed still faces “a tricky job” in trying to control inflation without triggering a recession, “the current framework clearly increases the chance of a slower economy,” Kleinhenz said.