The U.S. economy depends largely on consumer spending, which could be affected by the Federal Reserve's efforts to rein in inflation this year, according to the National Retail Federation (NRF).

NRF Chief Economist Jack Kleinhenz said in the March issue of the Monthly Economic Review that inflation is still a major challenge for the economy, despite easing slightly from its peak.

“Inflation has slowed less than expected and is still an important problem that remains to be solved,” he said.

The Consumer Price Index, which measures the change in prices of a basket of goods and services, rose 3.1% in January from a year ago, down from 3.4% in December. However, this is still well above the Fed's target of 2%.

The Fed uses a different measure of inflation, called the Personal Consumption Expenditures Price Index, which accounts for the changes in consumer behaviour and spending patterns. This index also showed a slight decline in inflation, from 2.6% in December to 2.4% in January.

Kleinhenz said one of the key factors driving inflation is the difference between the prices of services and goods. Services, such as health care, restaurants and transportation, saw a 4.9% increase in prices in January from a year ago, while goods, such as clothing, food and electronics, saw only a 0.1% increase.

He said this reflects the shift in consumer spending from goods to services, as Americans resume their normal activities after the pandemic. In the fourth quarter of 2023, services accounted for 65% of consumer spending, up from 63% in April 2021, but still below 68% in the fourth quarter of 2019.