Last Updated on March 14, 2023 by Luke Feldbrugge
Many people are asking, “when will inflation go down?” Because it really hit the average American household hard over the past year – a trend that will likely continue in 2023. Inflation in 2022 hit its highest rate since the 1980s as the U.S. economy recovers from the COVID-19 global pandemic. Here we take a look at inflation, what it means for the average American and when experts believe inflation will go down.
Inflation Rate in January
Inflation rose by 6.4% annually in January, according to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS). This was down slightly from previous months but remains near 40-year highs. Hyperinflation peaked last year in June when it hit 9.1% annually, according to BLS.
Since then the inflation rate has decreased. This declining trend in inflation levels is expected to continue in the months to come.
The main drivers of inflation over the past year have been rising prices for food, housing and gasoline. As gas prices have begun falling again, total inflation also edged lower.
The Federal Reserve is Trying to Lower Inflation
Although inflation is on the rise, the U.S. government has certain monetary policy tools that it can use to try to control or influence the direction of the inflation rate.
For example, the Federal Reserve can raise or lower the federal funds rate, which is the rate at which banks borrow money. As the federal funds rate rises, banks pass these increased costs on to consumers by raising interest rates on mortgages, student loans, personal loans, credit cards and other lending products. This then slows the rate of lending and the economy.
Last year, the Fed raised rates seven times in order to combat inflation levels. At its most recent meeting this year, the Fed increased interest rates by 25 basis points, bringing the target range for the federal funds rate to 4.5% to 4.75%.
And as inflation remains near decade highs, the Fed fought high rates by raising the federal funds rate by as high as 75 basis points, which it did five times in 2022. Now, the Fed will likely continue raising interest rates in order to bring inflation levels back down, but in lower increments.
“The FOMC raised rates once again and signaled that more hikes are in store,” NAFCU Chief Economist and Vice President of Research Curt Long said after the latest Fed meeting. “In stating that it continues to anticipate ‘ongoing increases’ in the fed funds rate to be necessary in order to tame inflation, the Committee is suggesting that several additional hikes are likely. The Committee appears committed to raising the fed funds rate above 5%, consistent with its December projection.”
Will it Go Up or Down in 2023?
Many economists expect we are headed toward a recession, if the U.S. is not in one already. The gross domestic product (GDP) rose by 2.7% in the fourth quarter, marking the second consecutive quarter of growth after declining in both the first and second quarters. Two consecutive quarters of negative GDP growth is typically considered a recession.
However, the White House and some economists have argued that other factors such as the strong labor market show the U.S. was not in a recession during the first part of 2023. But many economists agree that a recession is on the horizon. And some have noted that a recession could help slow rising inflation levels.
Fannie Mae’s Economic and Strategic Research Group said it expects the economy to eke out positive growth of 1% in 2022 before entering a modest recession in 2023, according to its February 2023 commentary.
“Right now, it’s difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.
“While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards,” Duncan said.
Inflation, as measured by the Consumer Price Index, decelerated again in January, and the ESR Group expects the Federal Reserve to closely monitor wage growth metrics to help it decide how long it should continue its interest rate increases, according to Fannie Mae.
How Does High Inflation Impact Housing?
Inflation can impact the housing market in several ways. Perhaps most notably, as the Federal Reserve continues to raise rates, it pushes mortgage rates higher.
At the beginning of March, the average 30-year fixed-rate mortgage rose higher after several weeks of decreases, it increase to the mid-6% range, according to the latest data from Freddie Mac. This is significantly higher than the average rate last year, which hovered below the 3% mark. As mortgage interest rates rise, housing payments become less affordable for new homes or to refinance as monthly payments move higher. This could cause more homebuyers to look for smaller homes or avoid buying a home altogether as they await a more favorable interest rate environment.
Fannie Mae’s ESR group forecasted that total home sales could decrease by 17.6% in 2023 as home sales decrease faster than the group previously expected.
“Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates,” Duncan said. “While some optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity and is at risk of declining again if rates reverse.”
High levels of inflation could also affect the housing market as consumers find it more difficult to save up for a down payment, or have less cashflow for the monthly payment on a home.
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