Americans are optimistic that inflation, which has caused havoc on households and businesses in recent years, will return to prepandemic levels soon. The latest evidence supporting this belief is a four-times-a-year survey by the Cleveland Federal Reserve of business leaders. Top executives predict that the rate of inflation will decrease to an average of 3.4% using the consumer price index (CPI) in the next 12 months.
The good news is that the CPI is already there. The rate of inflation for 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, due out Tuesday morning. However, a better measure of future inflation was somewhat higher. The core CPI, which excludes food and energy, stood at a 12-month rate of 3.9% at the end of 2023.
A long-running survey of consumers also found that Americans expect inflation to continue to decelerate towards prepandemic levels. Households expect 2.9% inflation in the next year, according to the consumer sentiment survey. Both surveys show that inflation expectations are what the Federal Reserve refers to as “well anchored.” In other words, nobody expects inflation to move up or down much from current levels.
The Fed wants inflation to be around 2% per year but it’s not yet there, but if consumers and businesses both believe it will reach its target then it will make the Fed’s job easier as expectations can influence themselves whether high or low.