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Fed: 2023 Will See ‘Significant Decline’ in Inflation

Falling prices at retail suggest that inflation is moving in the right direction.

That’s according to Federal Reserve Chairman Jerome Powell, who forecasted that 2023 would be “a year of significant declines in inflation,” with notable shifts already happening in the consumer goods sector. Personal Consumption Expenditures (PCE) inflation hovers at 5 percent—down from a 40-year high of 9.1 percent in June 2022. Powell believes it could reach the 2 percent global standard that the Fed is shooting for in 2024, he told an audience at the Economic Club of Washington on Tuesday.

“We have two goals that Congress has assigned us: maximum employment and price stability,” he added.The U.S. has 5 million more jobs available than workers engaged in the workforce or actively looking for employment. “The labor market is strong because the economy is strong,” Powell said, noting that “it’s a good thing that we’ve been able to see the beginnings of disinflation without seeing the labor market weaken.”

“If you look around the world at other countries, they’re also experiencing high inflation—including countries that didn’t do that as much as we did either from a fiscal or monetary standpoint,” Powell added. “That tells you that a big part of this inflation is actually related to the pandemic itself, the shut down and the reopening. That’s a big part of it.”

Inflation in the U.S. has been closely tied to the balance between supply and demand, and has been impacted by commodity prices set on global markets. Oil and energy, as well as agricultural commodities like cotton, are a part of an integrated global economy, and prices on those goods and services have been in flux for some time. “Inflation began with people not being able to buy services, instead buying goods, and then global supply chains collapsing so you couldn’t get goods,” he said. “Prices of goods went up… but that is now starting to get better as supply chains are improving.”

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The U.S. needs that process to continue in the goods sector, he added.

National Retail Federation (NRF) chief economist Jack Kleinhenz said last week that he believes the nation will likely skirt a recession, and that the economy is likely to see “slight growth in 2023” even as consumers continue to grapple with inflation and high interest rates.

Both corporate and household balance sheets are in good shape, which limits the downside risks, Kleinhenz said in NRF’s February monthly economic review. “A month into 2023, the economy is facing stiff headwinds and—with the exception of easing inflation—will likely face more challenges before it gets better,” he said. “I do not expect that the downturn will be severe enough to become an official recession.”

Following two consecutive quarters of falling numbers during the first half of fiscal 2022, gross domestic product (GDP) grew 3.2 percent year-over-year in Q3 and 2.9 percent in Q4, with the full year averaging 2.1 percent over 2021. Consumer spending grew 2.8 percent during 2022, but slowed in the latter half of the year, dropping 0.2 percent in November and another 0.3 percent in December. Kleinhenz said retail sales as defined by NRF—which exclude automobiles, gas and restaurants—were down 0.5 percent month over month in December, and combined sales between November and December were up 5.3 percent from 2021. “Choppy” holiday sales were “slower than expected.”

But with spending on the decline, PCE inflation eased to 5 percent in December, “its slowest annual pace in over a year,” down from 5.5 percent in November. Excluding food and energy prices, the PCE index was at 4.4 percent, prompting the Fed to increase interest rates in February by less than it had initially planned—a quarter of a percentage point, instead of a repeat of the half-point increase seen in December. Kleinhenz said the economy could either see a “sluggish pace of growth” or enter a period of “considerable falloff,” and that will hinge on the Fed’s ability to balance interest rates with inflation.

“We think we’re going to need to keep rates at a restrictive level for a period of time before [inflation] comes down,” Powell said. “It’s going to take some time, and just we need to be patient.”