What’s The US’ Projected Inflation Rate In 2023?
- Inflation has decreased in the US six months in a row, a sign that the Fed’s aggressive interest rate-raising approach is working
- Stock markets have enjoyed a brief bump thanks to a string of good news for the economy, after pricing in fears of a recession
- However, the Fed is expected to stick to rate increases after the lowest levels of unemployment in 50 years were revealed
Inflation: the boogeyman that affects your housing markets, your grocery prices and your wages. You can’t move for hearing about it at the moment.
US inflation rates rose to their highest levels since the 1980s last year, thanks to a string of geopolitical tensions and pandemic-related economic decisions. Now, we’re watching a delicate dance between the Fed, unemployment and interest rates unfold, aiming to tame the beast.
Let’s get into exactly what’s going on at the moment and how we could see US inflation behave this year.
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Why is inflation going down?
Headline CPI inflation peaked in June 2022 at 9%, then fell for six straight months to 6.5% by the end of the year. Meanwhile, the core PCE inflation rate peaked in Feb 2022 at 5.4% and is now 4.4%. Both of these are positive signs the runaway inflation train is pulling in at the station.
The Federal Reserve has been on the warpath to beat spiraling inflation since the whole saga began. It raised interest rates from historic lows at a punishing pace, with four successive three-quarter point increases in 2022.
But the central bank has been helped by serendipitous situations that arose late last year. China unexpectedly and suddenly reopened its markets, jumpstarting its economy, which has a ripple effect on the rest of the world.
Problems in the global supply chains have also helped to drop the price of everyday items. Gas prices also tumbled globally (though in the US, they’ve since begun to climb again).
So, could this mean interest rates might fall quicker than expected? Possibly not, thanks to a new spanner in the works.
What’s going on with unemployment rates?
Something weird is happening in the US labor market: the unemployment rate is now at its lowest level in 53 years. Half a million new jobs were added to the US economy in January, double the rate analysts expected and bringing the unemployment rate to 3.4%.
The jobs market has an interesting part to play in the inflation dance. When a lot of people are out of work, employers are flush with choices on who to hire and don’t have to sway employees with higher wages. This keeps wage inflation low.
Right now, it should be the opposite but instead, we’re getting mixed signals. While the job market is hot, wage growth is cooling down: average hourly earnings went from 4.8% in December to 4.4% a month later.
The outcome? It’s pretty hard for the Fed to decide whether or not to continue raising interest rates when unemployment is unusually low and the wage growth isn’t matching up. If anything, the news will bolster their resolve to increase them.
What’s the Fed doing in 2023 to counter inflation?
After its monumental effort to tame inflation in 2022, the Fed has begun to rein things in. The hikes have slowed recently, with the Fed announcing a quarter-point interest rate increase last week. Interest rates now sit at a target 4.5% to 4.75% range.
The Fed seems cautiously optimistic about inflation. Its chair, Jerome Powell, said in a press conference last week that while a “couple of more rate hikes” looked likely, “it is gratifying to see the disinflationary process now getting underway”.
Disinflation refers to slower price increases, which is in line with the gradually falling inflation we’re seeing. The Fed won’t want to be too punitive with interest rates when most of the population is experiencing economic hardship, but it risks inflation spiraling upwards again without fiscal tightening.
Despite this, the stock market has reacted positively to Powell’s words, enjoying a rally throughout January and spiking after the press conference. The S&P 500 is currently sitting 8% higher than at the start of the year.
This has drawn criticism from economic specialists for the Fed chair, with some arguing his too-upbeat focus on disinflation has given the markets false hope that talk of a recession is overblown.
What’s the consensus?
The truth is, there is no consensus right now.
The Fed is still clinging to its target of bringing inflation down to 2%. How quickly that happens depends on a lot of moving parts we’re yet to see unfold.
Experts are scratching their heads at how the labor market defies the usual economic pattern. Goldman Sachs’ chief economist, Jan Hatzius, told Insider the jobs news would embolden the Fed to stay the course with its interest rates plan. He expects them to hit the 5% mark in 2023.
This won’t be popular in a market that’s seeing the inflation rate fall six months in a row, the IMF upgrading the US economy’s growth forecast for 2023 and a housing market already on its knees.
Equally, we’re yet to see the full effect of the interest rates’ staggering climb. As borrowing costs, consumer spending and exchange rates are all affected, we’re only going to see the impact of the 2022 rate hikes this year. This could mean a slower economy, fewer jobs and less spending.
The housing market is one example of this. Sky-high house prices have now begun to cool off slightly, with month-on-month sales prices dropping 11% from the record of June 2022. Interest rates continuing to increase will impact mortgage approval rates, slowing this section of the US economy further.
In a nutshell, things aren’t looking clear – at all. Powell’s speech this week at the Economic Club of Washington DC could give us more insight into the Fed’s 2023 approach, but you’d need a crystal ball at the moment to predict what the tail end of 2023’s US economy is going to look like.
The bottom line
While no one’s exactly clear on the exact number for inflation in 2023, most agree that it will continue to trend downwards.
With that said, the timeline isn’t certain, and we’re still dealing with inflation figures that are super high by historical standards. For investors, that means that setting up your portfolio to protect against inflation is still a worthy objective.
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