Inflation Forecast 2023: US CPI Inflation Falls to 6.5%
Inflation Forecast 2023: In June 2022, the US recorded the highest consumer price inflation rate at 9.1%. US CPI fell to 7.1% in November. With Gas and Home Prices trending lower, the rate of inflation is likely to fall further.
Breaking: US Inflation Came in at 6.5% for December 2022
What has crashed?
- Used Cars
What has moderated?
- Medical care
- New Cars
What is still high?
- Fuel Oil
- Gas Utilities
- Food at Home
Inflation Forecast 2023
Gas prices crashed between 10 and 15% in December. This is likely to place enormous pressure on the inflation rate in December. US Gas prices are now lower than it was in December 2021.
In the meanwhile, US Home inflation has fallen significantly placing further downward pressure on inflation in December 2022. US Inflation in December 2021 was 7.0%.
As a consequence, we forecast US Inflation to fall between 6.5 and 6.7% in December 2022. Consensus Wall Street Estimate is 6.5%
- Our Forecast for July was 8.5 to 8.9%, Actual at 8.5%
- Our Forecast for August was 7.9 to 8.3%, Actual was 8.3%
- Our Forecast for September was 8.1 to 8.4%, Actual was 8.2%
- Our Forecast for October was 7.7% to 8.0%, Actual was 7.7%
- Our Forecast for November was 7.0 to 7.3%, Actual at 7.1%
- Our Forecast for December was 6.5 to 6.7%, Actual at 6.5%
Inflation Forecast 2023: Why did Inflation spike in 2023 and why is it falling now?
Inflation rose to historic levels in 2022 but is falling now and is likely to stabilize a little in 2023 before falling significantly in 2024. Here are 5 reasons why Inflation rose significantly in 2022 and 2023
- Massive Federal Reserve, ECB, and other central banks spending as a response to the Pandemic induced lockdowns and demand squeeze in 2020 which continued in 2021 as well
- Global supply chain issues led to significant supply chain-related problems and subsequent rises in prices. For example, US refinery capacities fell due to COVID lockdowns and are in still not online.
- Russian Invasion of Ukraine which completely disrupted commodity prices across the Globe
- Government borrowing and spending across the Globe to manage voter expectations even as recovery from the Pandemic took some time.
- Continued Govt spending (for example Biden 2022 Budget) in 2022 even as inflation breached 7%
Here is why Inflation is falling lower
- Rise in interest rates in the second half of 2022 leading to lesser liquidity and lower inflation
- COVID lockdowns in China led to lower demand in China which helped commodity markets in the short run
- Sanctions against Russia led to a spike in commodity prices initially but a subsequent fall in prices as Russians discounted their prices for customers in India and China
Inflation Forecast 2023: Will Inflation rise in 2023?
Inflation is likely to fall lower in 2023 for the following reasons
- Inflation was high for most of 2022. In comparison, the prices are unlikely to increase by much in 2023, at least until October 2023
- US rate hikes might be easing but they have not been paused yet
- US refined Oil production is rising and will place pressure on Oil prices even as Chinese demand rises
But upward pressure on inflation is likely to remain which means Inflation will perhaps remain at moderate levels in 2023. Here is why inflation will face upward pressures as well
- The Federal Reserve has signaled a lower pace of interest rate hikes
- Global supply chains will once again face massive pressure as China’s lockdowns have formally come to an end (Crude Oil and other commodities)
- It is unclear how the Russian invasion will turn out in 2023 (after the winter) and any deterioration could completely wreck commodity prices
Inflation Forecast 2023: Impact of High Inflation on the US Economy
- Increase in short-term interest rates: Inflation is never one-dimensional and very high or low inflation affects each sector of the economy differently. The Fed takes measures to control inflation, by increasing short-term interest rates and through policies of quantitative tightening. In the last meeting, the Federal Reserve increased the interest rates by three-quarters of a percentage point, its largest hike since 1994. There is likely to be another three-quarter rate hike at the Fed’s next meeting scheduled on July 27th. Following that, a half basis point hike is expected in the September meeting and then four more quarter-point increases in the next four meetings. That would bring the interest rate to 3.25% by end of the year and 3.75% early next year.
- Quantitative Tightening: The Fed will also sell Treasury and other mortgage-backed securities in order to suck the liquidity out of the market. The Fed plans to reduce the portfolio of $9 trillion in assets by $47.5 billion per month in June, July, and August and then increase it to $95 billion per month after that. The Fed will look to sell Treasury bonds rather than just letting maturing bonds
- Spike in Treasury bond yield: Long-term rates are not affected directly when the Fed raises short-term rates, but the inflationary environment does keep them high. Analysts expect that 10-year treasury yields to peak at 3.5% within this year. The rise in long-term bond yield will also push mortgage rates and the 30-year fixed rates loans rate should be around 6.0% from 5.4% and the 15-year loans rate will rise from 4.75% to 5.25%. Corporate bond yields have also risen due to inflationary pressure, with AAA bonds yielding 4.2% and BBB bonds 5.3%.
- Bear Sentiments in Stock Market: Hike in bond yield directly impacts, high inflation, and uncertainty on the global political front has led to the stock market falling significantly in the last six months. All indices like Nasdaq, S&P 500, and Dow Jones have fallen more than 30% in the last six months and are in bear territory. The main reason being a high bond yield moves money from the share market to the bond market as it is considered a safer investment. The market is likely to remain volatile till the inflation fears subside and bond yields reverse back to historic levels.