Will Inflation Get Better in 2023?

The good news is that there's reason to believe it will.

Inflation is one of those topics that doesn't tend to be very popular until it becomes a problem. Think about it -- how many times did you sit down with friends over coffee to talk about inflation before the latter part of 2021? Chances are, none.

But during the second half of 2021, inflation started to soar. And in 2022, consumers had to deal with raging inflation from start to finish. That forced many people to raid their savings and rack up debt on their credit cards just to stay afloat.

Now the bad news is that we're starting off 2023 with inflation levels still being considerably higher than normal. The good news, though, is that the rate of inflation has been dropping since peaking in mid-2022. And if that trend continues, consumers could soon be in for relief.

A positive trend

In January of 2022, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, was up by 7.5% on an annual basis. In June, the CPI peaked at 9.1%.

But inflation levels have been dropping since then. In July of 2022, the CPI fell to 8.5% on an annual basis. In September, inflation only rose by 8.2% annually ("only" being a relative term). And in November, the last CPI reading we have as of this writing, inflation was up just 7.1% from November of 2021.

If the rate of inflation keeps dropping in a similar fashion, then we could reach a point when living costs start to become more manageable during the second half of 2023. Does this mean that we'll get back to the days of 2% or 3% annual inflation this year, which is a more normal/moderate level? Not necessarily. But if inflation hits the 5% range by mid-year, consumers should be in a much better position than they were during the summer of 2022.

The Fed is doing its part

A big reason inflation levels surged in mid-2021 is that consumers found themselves flush with cash thanks to several rounds of COVID-19 stimulus payments. In fact, many consumers saw their bank account balances increase at a time when supply chains were starting to slow down due to pandemic-related hiccups. That created a disconnect between supply and demand that caused inflation to soar.

The Federal Reserve, meanwhile, has been raising interest rates in an effort to persuade consumers to cut back on spending. If they do so, it should narrow the gap between supply and demand that's led to rampant inflation.

The downside of the Fed's actions is that they could spur an economic recession. If consumers get fed up with or spooked by higher interest rates, they might cut their spending to an extreme degree, leading to a world of economic pain. But the Fed might get what it calls its desired soft landing -- a scenario where consumers cut their spending moderately enough to cool inflation without negative economic backlash.

At this point, it's too soon to tell whether the Fed will get that ideal balance. But we do know that the Fed is committed to slowing the pace of inflation. And so between that and recent trends, there's reason to believe that things will get better in that regard over the course of 2023.