In 2023, we probably see disinflation continuing as demand falls and supply will increase again. Also the Fed’s unprecedented rate hikes will put a grip on consumers spending and businesses hiring. Finally people run through all the excess savings they have had on hand since the massive stimulus effort by the federal government, which will further depress demand. The supply shocks that have limited the amount of goods and services available will largely improve in 2023. Research by Sea-Intelligence expects shipping supply chain issues to be completely resolved and full capacity regained by March 2023. So, we can expect inflation to continue to drop through 2023. Markets expect to decrease around the 4% level by the second half of the year. But this is still twice the Fed’s 2% target. It is low enough for the central bank to pivot to a neutral stance well before midyear.
While economic growth will certainly slow, will the US slide into recession in 2023? And what about the 2% inflation target set by the Jay Powell and his colleagues at the Fed? How will the Fed react?
Sven Franssen