“The market has a yoke around its neck and it’s not quite sure how tight it is,” CNBC contributor Karen Firestone said in our Tuesday, summing up the uncertain state of the economy. Earnings news has been mixed. Coke was good; General Electric was good; 3M was good. It is encouraging that two major global industrials have been broadly positive. And then, there’s the Walmart ad. The key point for investors was to refocus attention on inflation, and that it is not just about the direction of inflation, but the magnitude. Walmart cut its profit guidance for the second quarter and 2022 because inflation is causing its top shoppers to spend more on groceries (which have lower margins) while reducing their spending on general merchandise (which has higher margins higher). But we knew that. Target made essentially the same announcement a while back and also announced sales. What surprised the Street, as Dana Telsey of the Telsey Advisory Group noted this morning, is that “the magnitude of the decline at Walmart (and previously at Target) has been greater than expected.” Walmart guided second-quarter earnings down 8% to 9%, so analysts’ estimates for the second quarter, which had been around $1.81 a share, are now $1.66 and they will likely drop to the low $1.60 range. Total earnings in 2022 are expected to fall between 11% and 13%. If there’s any upside, it’s that the retail giant cited a strong back-to-school season and raised its sales guidance. The broader question is to what extent is inflation changing the overall spending habits of consumers? How far is it from Walmart’s customer base? “In our recent call with the company, we noted that the impact of inflation on consumer purchasing habits continues to broaden and reach a broader demographic compared to the relatively isolated impact seen in the first quarter ” Atlantic Equities retail analyst Daniela Nedialkova said in a note to clients. It’s fair to say that this will likely accelerate the decline in retail sales. More broadly, this will also lead Wall Street to momentarily refocus its attention. While concerns about the magnitude of an economic slowdown have occupied Wall Street’s attention for weeks, inflation remains the number one concern. I say “momentary” because Walmart’s announcement won’t erase the debate about the strength of the US economy. I noted last week that the phrase “mild recession” had become a meme as a way to price in a recession without sounding too mean. Even JPMorgan’s Marko Kolanovic jumped on the “mild recession” bandwagon, telling investors on Monday that “a mild recession already seems to have a price.” We’re not even done with the Federal Reserve’s rate hikes, and investors are already supposed to live through 2023, after the recession. “With the peak of Fed pricing likely behind us, the worst of the risk markets and market volatility should be behind us,” Kolanovic said. Even so, the Street continues to push the idea that the market has fallen enough. “We think a 20% drop in the market is enough damage,” Firestone said this morning.