Inflation has caused significant damage to households and businesses in recent years, but Americans are optimistic that the annual increase in prices will return to levels close to those seen before the pandemic. According to a four-times-a-year 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 (CPI) in the next 12 months.
The good news is that the CPI is already at this level. The rate of inflation in the 12 months ending 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 December 2023.
In addition, a long-running survey of consumers also found that Americans expect inflation to continue decelerating towards prepandemic levels. Households expect an inflation rate of 2.9% for the next year, according to the consumer sentiment survey. Both surveys show that inflation expectations are “well anchored,” meaning nobody expects much movement from current levels up or down.
The Federal Reserve wants inflation to return to its target rate of 2% per year, but it’s not there yet. However, if consumers and businesses both believe it will succeed in reaching its goal, it will make their job easier. This is because expectations can feed on themselves – high or low expectations often impact future outcomes accordingly