Inflation has posed significant challenges for households and businesses in recent years. However, there is a growing sense of optimism among Americans that the annual increase in prices will soon revert to pre-pandemic levels.
The Cleveland Federal Reserve conducts a comprehensive survey of business leaders four times a year to gauge market sentiment. According to this survey, top executives anticipate inflation rates to gradually subside and reach an average of 3.4% within the next 12 months, based on the consumer price index (CPI).
Interestingly, the current CPI figure already aligns with this optimistic projection. In fact, the inflation rate for the 12 months ending in December stood at 3.4%, and it is expected to further decline to 2.9% in the upcoming January report.
However, when considering future inflation trends, a more accurate indicator is the core CPI, which excludes food and energy prices. By the end of 2023, the core CPI had reached a 12-month rate of 3.9%.
Another survey focusing on consumer sentiment supports the notion that inflation will continue its deceleration towards pre-pandemic levels. According to this survey, households anticipate a 2.9% inflation rate in the coming year.
The significance of both these surveys lies in their consistency, depicting what the Federal Reserve refers to as “well anchored” inflation expectations. Simply put, the general consensus is that inflation is unlikely to deviate significantly from its current levels.
It is worth noting that the Federal Reserve ultimately desires a return to a 2% annual inflation target. While this target has not yet been met, the central bank’s task will be considerably smoother if both consumers and businesses believe in its ability to achieve this goal. After all, inflation expectations can often be self-fulfilling, regardless of whether they are high or low.
Also read: Financial markets expect consumer-price inflation to drop below 3% for the first time since 2021
And: Behind the $18 price tag on your Big Mac meal: A reason worth considering