The Inflation Outlook: By the Numbers

According to the Bureau of Labor Statistics CPI data, inflation for 2022 was 6.5%, with the annual rate slowing from 9% at mid-year. Prices increased by 0.8% in January 2023, showing that inflation persists. Three months of price increases at that rate would put inflation above the Fed’s 2% target rate in three months.

Prices tend to increase more in the year’s first half than in the second half. Systematic differences in economic data in different parts of the year are why data are often seasonally adjusted to remove seasonal fluctuations. In 2022, for example, all of the price increases, according to the CPI, came in the year’s first half. The CPI was 296.311 at the end of June and 296.797 at the end of the year.

Inflation tends to be persistent, so the Fed’s actions today will have an effect on inflation only in the future, typically in 6 to 18 months. If price increases were to persist at the 0.8% rate we saw in January, inflation would exceed 9% by the end of the year. Still, as is typically the case, we can expect much lower price increases in the year’s second half than we will see in the first.

Doing a back-of-the-envelope calculation, assume that prices increase during the first half of the year as they did in January, but (as happened in 2022) don’t increase in the second half of the year. Year-end inflation in 2023 would be about 4.8%. Inflation is moderating, but will remain well above the Fed’s target rate for 2023.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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