Where will inflation go next?

For many Americans enduring higher prices, easing inflation was on the wishlist for 2023 — and as of July, it’s looking like that dream just might come true. Inflation dropped to 3% in June, reaching its lowest level since May 2021 and marking the 12th month in a row that inflation has eased, based on the consumer price index released by the Bureau of Labor Statistics, USA Today reported.

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Still, consumers might not be feeling that much of a break. That’s because the core inflation figure, which NBC News explained “reflects everything except food and energy prices,” was at 4.8% as of June — just an incremental drop from 5.5% in May and a far cry from the Federal Reserve’s target of 2%. “If you want to hit a [2% core inflation] target, unfortunately I suspect an unemployment pickup will be necessary,” Riccardo Trezzi, lecturer at the University of Geneva and founder of a consultancy focused on underlying inflation, told NBC News.

Given the Federal Reserve considers the core personal consumption expenditures price index most heavily, it’s not entirely clear what steps it will take next, though many are predicting at least one more rate hike this year.

Where will inflation rates go next?

Halfway through 2023, it looks like inflation is beginning to moderate. But where it goes from here remains up for debate.

Inflation “should continue to ease over the next several months,” Kiplinger said. However, “reported 12-month inflation rates are likely to edge up a few tenths of a percentage point over the next several months, and then jump in late fall, hitting 3.9% in December before dropping quickly after that.” Core inflation could also see a “late-year uptick, though it’ll be smaller than the increase for total inflation.”

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Not everyone’s outlook is quite so rosy. Former Treasury Secretary Larry Summers contended that “it will require raising interest rates much more aggressively to fully get inflation under control,” while Trezzi was uncertain core inflation can decline “without imposing a burden on the labor market,” NBC News reported.

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In the words of Mark Hamrick, senior economic analyst at Bankrate, “Americans have put the worst of inflation behind, but the war hasn’t yet been won.” Nobody should be “popping the champagne just yet,” Hamrick said, per NBC News.

Are high prices on their way out?

Largely yes, though their exodus is uneven.  

For instance, “food prices remain broadly much higher than before the current surge of inflation,” Kiplinger reported, but categories like eggs and pork “have been falling.” Restaurant prices, meanwhile, are ticking up in smaller increments. And in areas like new cars and energy, prices are relatively stable. Additionally, shelter prices only rose modestly in June, per the Consumer Price Index.

Certain areas that have been seen as major drivers of inflation — namely used car and airfare prices — are “now showing signs of stabilizing,” Omair Sharif, founder and president of the research and analysis firm Inflation Insights, told NBC News.

What’s the Fed likely to do?

At its June meeting, the Fed hit pause on rate hikes after 12 consecutive increases in just over a year. But when it meets in July, it’s likely the Fed will raise rates yet again, this time to the 5.25%-5.5% range, according to Reuters.

Beyond that, it’s not clear what moves the Fed will take through the end of the year. Traders give it “a 20% chance of a rate hike in September and a 40% chance of one by November, after what is nearly universally expected to be a quarter-point increase at the U.S. central bank’s late-July meeting,” Reuters reported.

Should we be worried about a recession?

Maybe. The Fed’s staff economists “have continued to forecast a “mild recession” for later this year, according to CBS News. Plus, “the New York Fed’s recession probability model suggests a 67.3% chance of a U.S. recession sometime within the next 12 months,” Forbes reported. And HSBC Asset Management warned in July that the U.S. “will enter a downturn in the fourth quarter, followed by a ‘year of contraction and a European recession in 2024,'” CNBC reported.

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But then there are investors who think that “a recession warning that has been flashing on Wall Street for the past year may be sending a false signal — and think instead that the Federal Reserve will be able to tame inflation and still escape a deep downturn,” said The New York Times. Other signs that Wall Street is largely optimistic appear in the fact that the “S&P 500 officially entered bull market territory in early June, surpassing a 20% gain from its October 2022 lows, and is now up 15.6% year-to-date,” said Forbes.

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Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week’s sister site, Kiplinger.com

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