Briefing

When will inflation come down? Forecasts for 2023.

Things seem to be heading in the right direction, but high inflation is far from over

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New year, new inflation rates? For many Americans enduring higher prices, that's likely something on the wishlist for 2023. In November 2022, inflation did ease to 7.1 percent, down from 7.7 percent in October. It was the fifth month in a row that inflation rates have dropped. The annual rate is still steep, but things appear to be moving in the right direction. The question now is whether that will continue through 2023. Signs are pointing to yes, but there are a lot of factors at play. Here's a look ahead.

Where are inflation rates expected to go in 2023?

It depends on who you ask — and what the future holds.

Kiplinger predicted that "the slowing economy is likely to bring the yearly inflation rate down to 3.2 percent by the end of 2023." 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.

Meanwhile, NextAdvisor explained that there's "no clear answer among economists" to the question of whether peak inflation in the U.S. has passed. 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. NextAdvisor put it succinctly: "Economists and financial experts agree on one thing: Higher prices will likely last well into next year, if not longer." 

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?

The latest inflation data seems to have prompted the Federal Reserve to back off a bit on its interest rate hikes. On December 15 it raised its benchmark short-term interest rate by 0.5 percent, following four straight 0.75 percent hikes.

Even though wage increases are slowing, they still remain high. This could lead businesses to keep increasing prices in an effort to maintain profit margins, further fueling inflation.

So it's likely there are more interest rate hikes to come. Fed Chair Jerome Powell indicated the central bank would keep raising rates but probably slow its increases further at its next meeting at the end of January 2023. NextAdvisor explained that "[e]xperts say that we'll need more than one month of lower-than-expected inflation numbers" before the Fed can stop putting up rates.

Should we be worried about a recession?

Many experts are sounding the alarm. A Reuters poll of economists published in early December 2022 suggested that there is a 60 percent chance of a recession in 2023, with a slowdown in U.S. economic growth expected.

Treasury Secretary Janet Yellen has stated that there is a "[t]here's a risk of a recession," as has JPMorgan CEO Jamie Dimon, who warned that a "mild to hard recession" is possible. That sentiment was also echoed by Doug Duncan, senior vice president and chief economist at Fannie Mae. "The economy continues to slide toward a modest recession, which we anticipate will begin in the new year, with housing leading the slowdown," said Duncan.

For those who prefer a glass half-full approach, there are some experts with a rosier outlook. The Conference Board CEO Steve Odland told CNBC he thinks any possible downturn will be mild. And in an even more optimistic view of things, Goldman Sachs says its research indicates the U.S. will "narrowly avoid a recession." Its economists forecast that the chance of a recession in the next year is just 35 percent.

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

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