Will Inflation Keep Declining?

Inflation’s Downward Trend

Ever since peaking at 9.1% last June, the rate of inflation in the US has been on a reassuring downward trend. It hit 6.5% in December. Despite this good news, in the grand scheme, 6.5% remains well above the Federal Reserve’s goal of 2%.

For the remainder of the year, the Fed plans to base its rate decisions on three key sectors that provide both insight into and influence over inflation: goods, housing, and core services.

3 Sectors to Watch

Goods: During the pandemic, the prices of manufactured goods skyrocketed, due mainly to supply chain bottlenecks. These bottlenecks have largely since opened back up. This means that the prices of manufactured goods should ease over the coming months, which would be a positive sign for the Fed, investors, and consumers.

Housing: Record-low interest rates and a surge in remote work caused housing prices to go through the roof over the past few years. But while the cost of housing may keep rising through the spring, experts expect it should start to decelerate come summer.

Core services: Wage inflation is another economic factor that could keep the overall rate of inflation higher. Due to the tight labor market, Fed officials expect wage inflation to continue for the immediate future.

Of these three factors, core services is the only one that the Fed still views as a major issue.

Incoming Recession?

Economists expect that we could reach the Fed’s goal of 2% inflation by the end of the year. However, reaching this goal could come at a cost — namely, a recession.

The Fed has raised interest rates incredibly quickly over the past year to fight off high inflation. But increased interest rates will most likely stifle consumer spending and lead to more layoffs on top of the onslaught already seen across the tech industry. In other words, the US could enter a recession.

Remember, these are simply projections. The future, as always, remains unclear. But it’s still a good idea to start preparing today for a possible recession by year’s end. The easiest way to do so is to build an emergency fund. These should consist of 3 to 6 months of living expenses. A tall ask, to be sure, but a year is plenty of time to hope for the best and prepare for everything else.

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