Back to 2% Inflation? 2023 Could Be the Year

Some economists see signs of inflation relenting in the months ahead

 A person in a grocery store reads the label on a box of crackers.

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Inflation, still running at 8.2%, near the highest it’s been in 40 years, has so far resisted all attempts by the Federal Reserve to quash it—but is there light at the end of the tunnel? Perhaps surprisingly, a number of economists are seeing a glimmer. Opinions among experts vary as to when, exactly, the taming of inflation will happen.

On the “sooner rather than later” end of the spectrum, inflation will likely cool to 2% by the end of 2023, and go below that level by early 2024, James Knightley, chief international economist at ING, said in an email. Meanwhile, Conrad DeQuadros, senior economic advisor at Brean Capital, said 2% inflation isn’t likely to happen by the end of 2024 (as far as their forecasts go out). At Wells Fargo Securities, economist Michael Pugliese said their forecast for inflation, as measured by PCE (running at 6.2% a year as of August), has it slowing to 2.7% by the fourth quarter of 2023, and 2.2% by the fourth quarter of 2024.

“We are growing more confident that inflation should move discernibly lower in the coming months,” Pugliese and senior economist Sarah House wrote in a commentary. “Flagging consumer demand for goods, falling transportation costs, and rising inventory levels all point to more difficulty and less need for businesses to raise goods prices at the same wild pace of the past 18 months.”

Consumer price increases peaked at 9% year-over-year in June, and have slowly—ever so slowly—retreated since then as gas prices have come down a bit while prices for many other goods and services have shot up at a troubling rate. Inflation as measured by the Consumer Price Index (CPI) is running at 8.2% as of September, according to a Bureau of Labor Statistics report Thursday.

The Federal Reserve—the U.S. central bank tasked with keeping inflation steady—is aiming for a target of 2%, which it deems necessary for stable prices for consumers and a smoothly running economy. In recent months, the Fed has been rapidly raising its benchmark interest rate, inflicting pain on businesses and households across the country in the form of higher borrowing costs, in hopes of slowing the economy down enough to cool inflation. So far, none of that has had much impact on key inflation readings.

There are two major ways of measuring inflation: the more widely-reported CPI, and PCE inflation, which the Fed looks at more closely, and which was running at 6.2% on an annual basis at its most recent reading in August. When inflation will get back to 2% depends on which measure you use, although the two tend to follow the same basic trends, with CPI usually showing a slightly higher reading. Both are a long way from 2%, but there are reasons to believe they could start to decline more rapidly in the near future.

A major one is the housing market: The Fed’s interest rate hikes have translated into much higher borrowing costs for mortgages. The average rate for a 30-year fixed mortgage shot up to 6.92% this week, the highest since April 2002, mortgage giant Freddie Mac said Thursday. The prospect of sky-high monthly payments has driven many buyers out of the market, and the reduced demand has started to bring housing prices down.

And with home prices factoring heavily into inflation measures, sinking home prices could start to have an impact, Knightley said. There’s also evidence that corporations are losing some of their pricing power, Knightley wrote in a commentary, pointing to a recent survey by the National Federation of Independent Businesses showing that the number of small businesses planning price increases in the near future is sharply decreasing. Not to mention wholesale prices for used cars have been on the downslope, with auction prices dipping 3% in September from August, according to Mannheim Consulting, which tracks used auto sales—a trend which could also heavily influence overall inflation, Knightley said.

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  1. Bureau of Economic Analysis. “Personal Income and Outlays, August 2022 and Annual Update.”

  2. U.S. Bureau of Labor Statistics. “Consumer Price Index Summary.”

  3. Freddie Mac. “Primary Mortgage Market Survey.”

  4. National Federation of Independent Business. “September Small Business Economic Trends.” Page 9.

  5. ING. “40-Year High for US Core Inflation Heaps Pressure on the Fed.”

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