For many Americans enduring higher prices, easing inflation is likely something they had on the wishlist for 2023. The new year is now well underway, and in February, inflation did ease a bit — though it still remains high. Specifically, the consumer price index rose 0.4 percent in February, which puts the annual inflation rate at 6 percent, which is a far cry from the Federal Reserve's 2 percent target.
But the Fed's job of fighting off high inflation has gotten trickier, given the bank turmoil sparked by the collapse of Silicon Valley Bank. Still, Federal Reserve Chair Jerome Powell stayed the course in the Fed's March meeting, raising interest rates for the ninth time in a row with a quarter-point hike.
However, Powell indicated there remains "a long way left to go to lower inflation and that the road ahead is 'likely to be bumpy,'" The New York Times reports.
Where are inflation rates expected to go in 2023?
It depends on who you ask — and what the future holds.
As things stand, the Fed is caught between a rock and a hard place, as it attempts to lower inflation without sparking a recession. Powell warned at the Fed's March meeting that "recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation," though he said that the "extent of these effects is uncertain."
The "slowing economy is likely to bring the yearly inflation rate down to around 4.0 percent by the end of 2023," Kiplinger predicted. Preston Caldwell, head of U.S. economics at Morningstar, told TIME's NextAdvisor that "we expect inflation to undershoot 2 percent in 2023 and 2024," as sources of the current high rate recede and monetary policy tightens.
There's "no clear answer among economists" to the question of whether peak inflation in the U.S. has passed, NextAdvisor explained. Though there are promising signs — such as price declines in sectors like used cars, gas, and apparel — there are a number of factors at play in determining the future inflation rate, including Fed decisions on interest rate hikes, the strength of the U.S. dollar, and developments in the war in Ukraine. All of this to say, other experts contend that it could be two to three years before we see inflation truly come down.
Are high prices on their way out?
No, probably not. "Economists and financial experts agree on one thing: Higher prices will likely last well into next year, if not longer," NextAdvisor said.
However, we might start to see light at the end of the tunnel as supply chains adapt and supply and demand reach a better balance, alongside further action from the Federal Reserve.
What's the Fed likely to do next?
In March, the Fed forged ahead with its pledge to curb inflation by raising rates, in spite of a potential banking industry crisis. The decision for a 0.25 percentage point hike was, however, a more restrained approach than Powell initially suggested when he appeared before Congress pre-SVB collapse and seemingly hinted at 0.5 percentage point hike.
As far as next steps, the Fed said it plans to "closely monitor incoming information and assess the implications for monetary policy." Policy makers suggested that "some additional policy firming may be appropriate" to decrease consumer prices nearer to the Fed's 2 percent target. However, the "statement dials back previous language indicating a likelihood of 'ongoing increases,'" NBC News noted.
Should we be worried about a recession?
Many experts are sounding the alarm. A Reuters poll of economists published in early December 2022 suggested there was a 60 percent chance of a recession in 2023, with a slowdown in U.S. economic growth expected.
Then, in February, the New York Fed estimated that there was a 54.4 percent chance of a U.S. recession within the 12 months.
That estimate is underscored by burgeoning anxiety amid the recent collapse of SVB and broader uncertainty in the banking sector. Jason Draho, head of asset allocation Americas at UBS, told Reuters that he thinks the "odds of a soft landing have gone down and the likelihood of a hard landing has gone up." This sentiment was echoed by Emily Roland, co-chief investment strategist at John Hancock Asset Management. "Something is breaking right now and we think a recession has potentially been pulled forward," she told Reuters.
Goldman Sachs economists reported they have already seen lending conditions start to tighten as people grow fearful of an impending recession. In March, Goldman analysts revised earlier predictions from 25 perent up to a 35 percent chance of a U.S. recession in the next year.
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Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com