How high has US inflation gotten this year and where is it headed in 2023? | Inflation
Just a few years ago, inflation seemed like a problem that the US and many other major Western economies had overcome. “Is Inflation Dead?” asked Businessweek in 2019, under an image of a sick dinosaur. And then came Covid-19.
Supply chain problems, disease, death and war in Ukraine have upended world trade. Fueled by government donations and savings, consumers rebounded from pandemic shutdowns only to find that shortages of everything from used cars to homes were triggering a cost-of-living crisis that didn’t go away. seen in a generation. US inflation this year reached a maximum of 40 years.
now there are some signs that price increases will slow down in the coming year. But the big picture is complicated. Here’s some of what we know about inflation this year and where it’s headed.
How much did inflation go up this year?
Inflation reached highs this year not seen since the 1970s. Inflation started at 7.5% in January and eventually climbed to 9.1% in June, when petrol prices were reaching $5 (£4) a gallon in some states. The inflation rate for gas prices alone was 60% at one time, largely due to the fallout from the Russian invasion of Ukraine.
Rising oil prices and ongoing supply chain issues from Covid-19 kept food prices high. Semiconductor chip shortages continued into the first half of 2022, keeping prices for new and used cars high.
Even as inflation started to decline from its peak in June, core inflation, which is the price of all goods and services except the volatile energy and food markets, rose to 6.6% in September, showing just how widespread was inflation.
The past few months have finally seen inflation come down, at rates lower than economists expected. In Novemberinflation was 7.1%, the lowest rate this year.
Did economists expect inflation to go that high?
Not quite. Many economists, including those at the Federal Reserve, believed that inflation would be “transient”, or temporary, and would decline in 2022 as supply chain issues are resolved and people reduce their spending. It was the message that both Joe Biden and Fed Chairman Jerome Powell were promoting at the end of 2021.
Instead, supply chain problems continued, particularly as the Omicron variant emerged and proved difficult to control. Then Russia invaded Ukraine in late February, causing massive disruption to global supply chains, particularly the energy market. And even amid continued price increases, US consumers continued to spend, showing that the demand pent up by the pandemic was higher than expected.
What has the Federal Reserve done to address inflation?
The main tool the Federal Reserve has to address inflation is to adjust interest rates, which is intended to moderate spending by making borrowed money more expensive.
Starting in March, the Fed began raising interest rates at a fairly aggressive pace. In December, the Fed raised interest rates for the seventh time this year, moving interest rates from 4.25% to 4.5%.
Economists say that high interest rates have played only a small role so far in lowering the rate of inflation. So far, high interest rates have been felt primarily in the housing market, as rates directly impact mortgages. Home sales have been falling since February.
“Most of the time it takes time. It certainly played a role a bit, but I don’t think most of the Fed’s tightening will be felt until next year, or even to some degree in 2024,” said Michael Pugliese, an economist at Wells Fargo.
Will inflation continue to decline in 2023?
fed chair Jerome Powell is taking a pessimistic view on inflation in the coming year.
“We have continually expected to make faster progress on inflation than we have, ultimately,” Powell said on December 14, after the Fed’s latest rate hike. The Fed has indicated it has aiming to keep raising rates until they hit around 5% to 5.5%, signaling concern among Fed officials that inflation will prove stubborn.
But compared to where things were last year, things seem to be in a better place, said Claudia Sahm, a former Fed economist and author of “Stay-At-Home Macro.” Newsletter.
“Things that seemed to be getting better this time last year didn’t get better, they got worse… This year, things are remarkably improving, and the best is coming from five directions instead of one,” Sahm said. “It seems there are more reasons to be optimistic.”
Covid-19 seems to be more contained now than it was this time last year when the Omicron variant started to spread. Supply chain issues are easing, leading, for example, to falling prices for new and used cars. The United States has adjusted to the shock to the energy market caused by the Russian invasion of Ukraine.
With this in mind, Sahm is cautiously optimistic about inflation in the coming year.
“We are not on the other side of this. It’s going to be tough, it’s going to be a wild ride, but everything is lining up for 2023,” Sahm said. “Unless something else bad happens in the world, 2023 is a way back to something that will seem normal.”
What about unemployment in 2023?
The Fed has a double mandate: keep prices stable and maximize employment. Right now, he’s focused on getting inflation back down to his 2% target, and the biggest casualty of that policy is likely to be his second term: keeping people in work.
So far, the labor market has ignored inflation and Fed rate hikes. While price pressures have been high, the unemployment rate, at 3.7% in November, is about same as before the pandemic, which was an all-time low.
As the Federal Reserve continues to raise interest rates, unemployment will rise. The Fed projects that unemployment will rise to 4.6% next year. Other estimates, such as Wells Fargo, have the peak closer to 5.5%.
The Fed hasn’t raised rates this aggressively in decades, and since it takes time for those increases to trickle down to the real economy, it’s too early to predict how many people will lose their jobs. That will depend on how the economy responds to the Fed’s continued rate hike.
“The Fed is overcompensating for getting burned last year” when they predicted that inflation would be transitory,” Sahm said. “If the Fed gets too dovish… tries harder and harder than necessary, we all pay for that.”
the federal reserve raised interest rates again this month, although at a lower percentage than its last four hikes. Still, critics accuse the Fed of doing too much, too soon. Senator Elizabeth Warren, who has criticized Powell for aggressively raising rates, tweeted that “their rate hikes risk putting millions out of work.”
“You should remember that the people who will lose their jobs are not the stockbrokers or CEOs, it’s the workers who need that paycheck every week.”
The shadow of inflation may be fading, but it looks set to hang darkly over the economy well into 2023.