When Will Inflation Finally Drop?

Greetings LinkedIn readers! Welcome to the lead story from The Kiplinger Letter, a weekly business and economics forecasting newsletter. Subscribe below for our full reporting on finance, economics, the markets and more.

-----------------------------------------------------------------------

The question hanging over markets now:?When will inflation finally start to recede?

The Federal Reserve has indicated that it won’t stop or slow down its campaign of interest rate increases until prices stop climbing at their recent steep rate. That likely means more pressure on financial markets and on the economy as borrowing costs zoom higher.?

Get a free issue of?The Kiplinger Letter , no info required from you.

We look for inflation to finally drop in 2023.?

In the first quarter of 2023, to be specific.?Without some new source of inflationary pressure, which isn’t apparent for now but can’t be ruled out, year-over-year price rises should lose steam early in the new year. Prices began soaring early this year, so the year-over-year change by March of next year should be smaller. After ending this year up 7.7%, the Consumer Price Index could show inflation easing to 5.5% by spring. By the end of 2023, it could be as low as 3%.?

For now, expect inflation to stay high, and the Fed to stay aggressive.?

The Fed should continue hiking rates at its November and December meetings. The Fed funds rate will rise by at least another full percentage point by year-end, and maybe by a point and a half.?Rising interest rates will keep weighing on credit-sensitive industries, especially housing . Manufacturing is showing signs of weakening, too. Consumers will be strained by the combination of still-high inflation and rising borrowing costs.

Stocks and bonds both face rising competition as yields on safe cash holdings rise.?How much damage will the economy sustain before inflation finally cools and gives the Fed the chance to pause, or at least slow down, its interest rate hikes??

At least a mild recession seems hard to avoid at this point.

The Fed’s policy is designed to slow the economy by reducing spending and encouraging saving. It will be very hard to slow the economy enough to contain inflation without sending it into some degree of recession …the infamous “soft landing” that the Fed rarely sticks.?

There’s also a risk that the Fed keeps its foot on the brake pedal too long in its bid to slow inflation, and ends up provoking a deeper recession. Fed officials are emphasizing their determination to cure inflation, even at the cost of job losses and other economic pain. If they don’t feel inflation has cooled enough by the spring to ease up on rate increases, the resulting recession could really hurt.

Higher rates could also raise concerns about some sort of debt trouble, somewhere in the world. The recent losses suffered by British pension funds, and the Bank of England’s need to intervene in British bond markets, may have been a unique problem. Or maybe not.?

Just how determined is the Fed to tame inflation? We think it is serious.

Chair Jerome Powell has drawn parallels to the Fed’s anti-inflation campaign of the early ’80s, which triggered a severe downturn, but did finally break inflation. Hopefully, he won’t have to reenact that process now to conquer today’s inflation.?

Get a free issue of?The Kiplinger Letter , no info required from you.