Sub-2% Inflation Is on the Horizon, But It Won’t Last
A strong labor market and lower prices for housing and consumer goods will help keep the economy growing this year, but brace for a rebound back into "too hot" territory.
Go ahead and celebrate for now.
Photographer: Kevin Dietsch/Getty Images
One of the main questions for the US economy in 2023 is how the trajectory of inflation will unfold. While the Federal Reserve's forecast for core inflation this year is 3.5%, the view of markets is that it will come in somewhat lower than that, particularly after Thursday’s Consumer Price Inflation report. But the evolution of the ”core goods” and housing-related parts of inflation, which account for roughly 70% of core inflation overall, suggest that even the markets have a forecast that's too high.
On the surface this is great news — who wouldn't want inflation to be lower than expected? But there are significant caveats here. Rather than settling at a low level, inflation is going to bottom out at an unsustainably low point — perhaps as low as 1% — before bouncing back, possibly to a level above 3% that's still "too hot." This is going to pose a challenge to both investors and the Federal Reserve.