When Will Inflation Go Down?

The Federal Reserve’s plan to cure inflation will take time. Here’s when we’re likely to see progress.
Hal M. Bundrick, CFP®
By Hal M. Bundrick, CFP® 

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The Federal Reserve is slowing the economy with a series of painful interest rate increases. Its goal: Reduce the nearly 5% year-over-year rise in consumer prices down to a 2% target.

With numerous interest rate hikes already under our belt, many of us may wonder: When will inflation go down?

Brace for another year of high interest rates — and prices

Most analysts agree — and Federal Reserve Chair Jerome Powell has said as much — there is still work to be done to tame inflation.

"Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go," Powell said at a press conference on May 3.

The timeline to lower inflation

Here's how things are expected to go as we wash inflation out of the economy:

As the Fed pauses additional interest rate hikes, the cost of money for home purchases and refinances is likely to remain expensive until inflation eases. While current 30-year mortgage rates near 7% are below the half-century average of nearly 8%, we're not likely to see a turn much lower over the next 12 months.

You'll also continue to see high-interest fees for carrying a balance on your credit card.

In 2023

The quarter-point rate hike in May might have been the last. Analysts are expecting the Fed to stand pat for a while, seeing how the tighter money supply impacts the economy and, most importantly, consumer prices.

Following an extended period of solid job growth as the pandemic waned, employment is softening. There are likely to be more layoffs and corporate cutbacks. There will be less talk about "the great resignation" or "quiet quitting."

A growing number of analysts believe the impending economic slowdown may be enough to tip the U.S. into recession.

One significant voice in the crowd sounding a recession alarm is Doug Duncan, chief economist for Fannie Mae, a government-sponsored company that fuels financing for the home mortgage market. He expects a "modest recession" will begin in 2023.

In 2024

A September CNBC survey of analysts, economists and fund managers reveals that most believe that by 2024 inflation will have sunk close to the Fed's 2% target.

If so, we'll enjoy lower prices for groceries, consumer goods and the general cost of living. However, we'll also likely experience higher unemployment and a sputtering economy.

Once the Fed reaches its 2% inflation goal, it will begin lowering interest rates to restimulate the economy.

Yes, lower rates.

These scenarios are based on a “just right” economic reaction to the Fed's interest rate action. Of course, as our pandemic times prove: There are plenty of unknowns that can spoil the best-laid plans.

What could go wrong? The Fed might stall the economy with higher interest rates but consumer costs might be stuck as well — not moving lower at all. It's called stagflation.

What does this mean for your financial decisions?

We don't live our lives according to a macroeconomic plan. We fall in love, have babies, buy houses and get new jobs, all at the whim of unknown forces. So the Fed will do its thing — and you should do yours.

  • Don't make an iffy financial situation worse, such as by taking on too much debt.

  • Remember that building wealth is an ongoing and lifelong process. Small steps yield long-term results.

  • Understand that a good idea today will be a good idea tomorrow. Rush money decisions are often made under false deadlines.

» MORE: Money News & Moves gives you context on financial news from a certified financial planner.