The Federal Reserve has been raising interest rates for months in an attempt to curb inflation, which by one measure had been running at a 40-year high over 8% for much of 2022. Last week’s data was a welcome sign that price growth is finally beginning to slow down, and that household budgets would finally see some relief.
And there could be more where that came from. Here’s what experts are saying about inflation in 2023.
Over the weekend, analysts from Goldman Sachs forecast that one key measure of inflation — the core price consumption expenditures index, or core PCE — could drop to 2.9% by the end of 2023.
Core inflation is different from headline inflation. Core inflation excludes food and energy prices, which tend to swing more frequently and dramatically than other prices. The Federal Reserve keeps a close eye on core PCE inflation, and targets a level of 2% in a healthy economy. (To make it even more confusing — these numbers are different from inflation measured via the consumer price index, or CPI, which came in at 7.7% on an annual basis in October, down from 8.2% in September.)
Right now, core PCE is at 5.1%. Goldman’s experts expect that number to drop as supply chain constraints improve, rental price growth slows down, and wage growth slows down, too. Those three factors are signs the economy is on its way back to a healthier state.
Other experts agree, though some are more optimistic than others in terms of how low inflation could go. Economists from the Conference Board, a non-partisan business think thank, are projecting core PCE to fall to 2.8% on an annual basis in 2023.
Why inflation will drop in 2023 (probably)
In a blog post, Preston Caldwell, head of U.S. economics for Morningstar Research Services, notes that certain categories of goods — like cars and energy — have been the primary drivers of inflation over the past year or two.
He expects pressures affecting those industries (the semiconductor shortage, for instance, along with supply chain snags and disruptions caused by the war in Ukraine) to ease up. Between that normalization and higher interest rates, Caldwell says inflation is on its way back to normal levels.
“Fed tightening will cool off the overall economy substantially in 2023 and 2024, extinguishing the inflationary fire before it spreads to the broader economy,” he writes.
This article originally appeared here and was republished with permission.