How much higher did US inflation rise this year? Where will it be in 2023?

A few years ago inflation was seen as something the US and a lot of other western economies could not handle. “Is inflation dead?” Businessweek asked in the year 2019, with an image of an ailing dinosaur. Then came Covid-19.

Supply chain problems, illness, deaths, and the conflict in Ukraine caused a disruption to trade across the globe. Aided by government grants and savings, consumers rebounded from the panic-inducing shutdowns but a limited stock of anything from second-hand vehicles to housing, which was triggering the cost of living crisis that was not seen in a generation. US inflation in the year to the 40-year mark.

There are signs that price hikes will slow down in the coming year. But the picture overall is complex. Here’s the facts we know about inflation in the current year and the direction it’s headed.

How high was inflation this year?

The inflation rate reached levels this year unmatched in the past since 1970. Inflation peaked at 7.5 percent in January. It then climbed to 9.1 percent in June, in which gas prices were reaching $5 (PS4) for a gallon in certain states. The rate of inflation for gas prices was as high as 60% at the time due to the repercussions from the Russian incursion into Ukraine.

The rising cost of oil and the lingering Covid-19 supply chain concerns led to food prices rising. The shortage of semiconductor chips persisted throughout the first half of 2022, which kept prices for used and new cars up.

While inflation was beginning to come down from its high in June, the cost of core inflation which is the value of everything except for volatile markets for food and energy was up in September, rising to 6.6 percent, demonstrating just how prevalent the rate of inflation was.

The past few months have seen inflation dropping, but at rates that were lower than economists anticipated. In November, the inflation rate was at 7.1 percent, the lowest level this year.

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Did economists anticipate inflation to be this high?

But not really. Many economists, such as those at the Federal Reserve, believed that inflation was “transitory”, or temporary and would slow down in 2022 when supply chain issues were resolved and people cut back on spending. It was the message each Joe Biden and Fed chair Jerome Powell were touting at the close of 2021.

However, supply chain problems remained especially since the Omicron variant was discovered and was difficult to manage. Then Russia attacked Ukraine towards the close of February, causing massive disruption to the global supply chains, specifically in the energy sector. Even with the constant rise in costs, US consumers continued to spend, proving that the accumulated demand for pandemics was higher than anticipated.

How high did US inflation get this year and where is it headed in 2023? https://t.co/M1rmeL9oH6

— The Guardian (@guardian) December 26, 2022

What has the Federal Reserve done to address the issue of inflation?

The primary tool that the Federal Reserve has to address inflation is to alter interest rates. This is intended to reduce the amount of spending, by making borrowing more costly.

In March, the Fed started increasing interest rates at a high rate. In December the Fed increased interest rates seven times in this year, raising rates up from 4.25 percent to 4.5 percent.

The economists believe that the increased interest rates have had a minor impact so far in bringing the inflation rate to a lower. As of now, the increased interest rates have mainly been felt in the housing market because mortgage rates directly affect the rate. The sales of homes have been decreasing in February.

“It generally requires time. It definitely played an amount but the bulk in the tightening by the Federal Reserve believe won’t be felt until the next year or perhaps up to 2024,” said Michael Pugliese as the chief economist of Wells Fargo.

Is inflation likely to continue coming down by 2023?

Fed Chair Jerome Powell is taking a negative view of inflation for the next year.

“We’ve continually expected to make faster progress on inflation than we have, ultimately,” Powell declared on the 14th of December, following the Fed’s most recent interest rate increase. The Fed has said it’s intending to continue raising rates until they reach between 5% and 5.5 percent, signaling Fed officials’ concerns that inflation could be intractable.

However, compared to how things were in the past it appears that things are improving as per Claudia Sahm, a former economist with the Fed and co-author of the “Stay-At-Home Macro” newsletter.

“The things that looked like they were getting better this time last year didn’t get better, they got worse … This year, things are getting notably better, and the better is coming from five directions instead of one,” Sahm declared. “It feels like there’s more cause to be optimistic.”

Covid-19 appears to be better controlled than at this point last year at the time that the Omicron variant began to spread. Supply chain issues are lessening down, which is resulting in the likes of prices for used and new cars decreasing. The US has adapted to the impact on the energy market triggered by the Russian attack on Ukraine.

With this in mind, Sahm is cautiously optimistic regarding inflation over the coming year.

“We’re certainly not at the opposite end of this. It’s going to be messy, and it’s going to be an exciting ride, but everything’s getting ready to take place in 2023.” Sahm said. “Unless something else bad happens in the world, 2023 is a path back to something that’s going to look normal.”

What will be the outlook for unemployment in 2023?

The Fed has two mandates that is to ensure stability in prices and increase the number of jobs. The Fed is currently focusing on bringing inflation back to its desired level of 2%. However, the largest victim of this policy will likely be the second one to keep people employed.

The job market has resisted inflation and Fed rate increase. While the price pressures are high however, the unemployment rate – at 3.7 percent in November is roughly the same as that it was prior to the pandemic which was record-breaking low.

While the Fed continues to raise prices of its interest rate, unemployment is expected to increase. The Fed estimates that unemployment will rise to 4.6 percent in the next year. Other estimates, such as Wells Fargo, have the highest point closer to 5.5 percent.

The Fed hasn’t raised rates this quickly in a long time and because the time takes for these increases to be absorbed through the economy it’s too early to know how many people could have to lose jobs. It will all depend on how the economy reacts to the Fed’s constant rate hikes.

“The Fed is overcompensating for getting burned last year” when they forecasted that inflation would be temporary,” Sahm said. “If the Fed gets overly cautious … goes harder and further than they need to, we all pay for that.”

The Fed increased interest rates once more this month, though with a lower percent than its previous four rate hikes. However, critics say the Fed has taken excessively, and too fast. The senator Elizabeth Warren, who has been criticizing Powell for raising rates too quickly, tweeted that “his rate hikes risk throwing millions out of work”.

“He should remember that people who’ll lose their jobs aren’t stockbrokers and CEOs, it’s working people who need that paycheck every week.”

Shadows of the inflation could be receding, but it seems likely to hang darkly over the economic landscape until 2023.