American households and businesses have been hit hard by inflation in recent years, but there is hope that the annual increase in prices will soon return to pre-pandemic levels. The latest evidence to support this optimism is a survey by the Cleveland Federal Reserve of business leaders. Top executives expect the rate of inflation to decrease to an average of 3.4% using the consumer-price index in the next 12 months.
In fact, the rate of inflation in the 12 months that ended in December was already at 3.4%, and it’s expected to drop to 2.9% in the January report, which will be released on Tuesday morning. While a better measure of future inflation would be slightly higher, at a 12-month rate of 3.9%, both surveys show that inflation expectations are well anchored, meaning nobody expects much change from current levels.
A long-running survey of consumers also found that Americans expect inflation to continue its downward trend towards prepandemic levels. Households predict 2.9% inflation for the next year, according to the consumer sentiment survey. This shows that both consumers and businesses are aligned in their expectations for low inflation rates moving forward.
The Federal Reserve has set a target for inflation at 2% per year, but it hasn’t reached this level yet. However, if both consumers and businesses believe that this goal is achievable, it will make it easier for the central bank to reach its target in the future. This is because expectations about future events can have a self-fulfilling prophecy effect on economic outcomes such as price changes.
Therefore, while there is some good news on the horizon for those looking for lower prices, it’s important not to get too excited just yet as we may still see some fluctuations before reaching our desired range.
Also read: Financial markets are counting on consumer-price inflation to fall below 3% for first time since 2021.
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