The US Inflation Outlook, 2023
In June 2022, headline inflation in the US reached a 40-year high of 9.1%, spurring multitudes of news articles about the US economy and its impact on the US consumer wallet. To curb inflation, the US Federal Reserve started increasing interest rates in H2 2022. Global oil prices, which reached a 10-year high during H1 2022 due to the Russia-Ukraine war, also started declining in H2 2022 as the concerns about a possible global recession in 2023 and a decline in global oil demand outweighed worries about an insufficient oil supply. As a result, inflation declined gradually in H2 2022, reaching 6.5% in December 2022.
Inflation Varies By Category
The headline inflation number is important, but keep in mind that inflation varies (sometimes significantly) by category. The chart below, constructed using data from the U.S. Bureau of Labor Statistics (BLS), depicts a heatmap of U.S. inflation by category from June 2022 to December 2022.
- All items. The headline inflation number has gradually declined from 9.1% in June 2022 to 6.5% in December 2022.
- Food. Food inflation is still growing by double digits. It was 10.4% in December 2022. Inflation for food at home (11.8%) is higher than food away from home (8.3%).
- Energy. Energy prices have decreased, largely driven by the decline in gasoline prices. However, electricity and gas prices are still growing by double digits.
- All items not including food and energy. If we exclude food and energy, inflation remained between 5.7% and 6.6% during the period June to December 2022. Clearly, the headline inflation was driven by the increasing prices of food and energy.
- Select retail categories and services. The U.S. BLS provides inflation data for over 300 goods and services categories. Here are inflation trends in a few retail categories and services: Appliances, apparel, furniture and bedding, and sporting goods had inflation of less than 5% in December 2022; alcoholic beverages, new vehicles, and personal care products had inflation of between 5% and 10% in December 2022; tools, hardware, outdoor equipment and supplies, pets and pet products, transportation services, and airline fares had an inflation rate of more than 10%.
Where Is Inflation In The US Headed In The Next Few Years?
As of early 2023, inflation has started to cool. Per the International Monetary Fund (IMF) forecast, US annual inflation in 2023 is expected to decrease to 3.5% (please see the chart below). However, that inflation rate will still be higher than in pre-pandemic years. We can compute annual inflation by taking an average of monthly inflation rates during a year. The IMF data indicates that it expects annual inflation in the US will settle back at pre-pandemic levels by 2024.