Will Inflation Slow Down in 2023?

Inflation is soaring now. What does the upcoming year have in store?

Ask just about anyone what their credit card bills look like these days, and the answer you'll get is probably something along the lines of "higher than usual." The reality is that inflation has been rearing its ugly head since last summer, driving the cost of everything from food to utilities to apparel upward. 

At this point, consumers may be resigned to the fact that they're stuck with soaring inflation for the rest of 2022. In fact, economists were actually expecting the Consumer Price Index, which measures changes in the cost of consumer goods, to drop in August on a monthly basis. Instead, it rose slightly from July.

But while we may be in for several more months of rampant inflation, the big question is: Will inflation slow down in 2023? While we can't say for sure, here's a scenario that might play out.

Inflation could moderate -- but not right away 

A big reason inflation has been so high this year is that last year, Americans received stimulus checks at a time when supply chains were already battered due to pandemic-related woes. That created an excess of demand for goods. And when you have a situation where consumer demand exceeds supply, prices tend to rise. 

As such, for inflation levels to come down, supply needs to catch up with demand or demand needs to weaken. And the Federal Reserve is taking steps to help us arrive at that sort of scenario.

The Fed has been aggressively implementing interest rate hikes with the goal of making it more expensive for consumers to borrow money, whether in the form of personal loans or credit cards. As borrowing gets costlier, consumers are likely to cut back on spending, thereby shrinking demand so it doesn't exceed supply to such a big extreme.

Now, it may take time for the Fed's actions to trickle down to spending levels. And so we shouldn't necessarily expect inflation levels to shrink at the start of 2023. But might we see some marked improvement by, say, the middle of the year? That's a strong possibility. 

In fact, earlier this year, the nonpartisan Congressional Budget Office said that while it expects high inflation to persist into 2023, inflation should slow down next year. And that's reason enough for consumers not to lose hope.

How to cope with inflation

While inflation could reach more moderate levels in 2023, we're clearly not there yet. And so for now, the best thing consumers can do is rethink their spending and do their best to cut back on non-essentials, all the while trying to find ways to save on essentials (for example, seeking out grocery store sales to save on food). At the same time, consumers can take advantage of the strong labor market by looking for better-paying jobs or negotiating higher wages. 

Right now, a lot of companies are still looking to hire despite warnings about a potential recession. Those who are struggling financially due to inflation should seek out ways to leverage that need and use it to their advantage.