Skip to Content

What does the potential path forward for inflation look like in 2023?

Inflation has likely peaked, but a return to the Fed’s 2% target is likely to take some time. The result? More interest rate hikes in 2023.

Base effects should help ease headline inflation

Inflation is still running hot today, but disinflationary forces are becoming increasingly apparent in some underlying measures of prices, allowing the headline CPI figure to drift downward from its June peak. The better-than-expected increase in the October CPI provided a brief boost for equity markets, as investors search for signs that the Fed may be able to ease away from its hawkish stance. Directionally, the likely trend for inflation is lower – but how much lower — and how rapidly the pace of inflation may ease — remain in question.

The near-term outlook for inflation should benefit from normalization in supply chains and declining global demand. It should also benefit from more favorable base effects, which reflects the difference between prices today and one year ago. The chart above illustrates this base effect, assuming three scenarios for month-over-month inflation: future increases are: 1) consistent with the past six-month average; 2) in line with the past 10-year average; or 3) flat (no inflation). If inflation were to return toward its long-term average, headline CPI could decline to near 2.5% by late 2023, holding all other factors constant, as illustrated in scenario 1. However, if inflation continues at a pace comparable to the last six months (scenario 2), inflation readings would retreat but stay stubbornly above the Fed’s desired 2% target. Finally, even in the highly unlikely event that prices were unchanged in the coming months (scenario 3), headline inflation would remain above 2% until June 2023.

Bottom line? Inflation is likely to continue to gradually recede in the coming months, but a return to the Fed’s target will take time. Elevated inflation is likely to cast a cloud of uncertainty over the economy well into 2023. Lower inflation should allow the Fed to curtail the pace of its rate hikes as soon as this month. Still, the inflation outlook will keep the Fed in a tightening mode heading in 2023.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

Related Thinking

Office with empty desks
February 3, 2023

Job creation remains strong despite recession risks

Blog 3 min read
People walking down steps talking
February 2, 2023

Where does the Fed stand in meeting its dual objectives?

Blog 1 min read
Woman standing in window holding up a help wanted sign
February 2, 2023

What’s behind the tight labor markets?

Blog 1 min read