Americans are hopeful that the annual increase in prices will return to prepandemic levels, with top executives expecting the rate of inflation to taper to an average of 3.4% in the next 12 months. The consumer-price index (CPI) is already showing signs of this optimism, with the rate of inflation in the 12 months that ended in December at 3.4%. However, a better measure of future inflation is the core CPI, which omits food and energy, standing at a 12-month rate of 3.9% at the end of 2023.
A long-running survey of consumers also found that Americans expect inflation to continue to decelerate toward prepandemic levels, with households expecting 2.9% inflation in the next year. These surveys show that inflation expectations are “well anchored,” meaning nobody expects inflation to move up or down much from current levels.
The Federal Reserve wants inflation to return to its target of 2% a year, but it’s not there yet. However, if consumers and businesses both think it will succeed in reaching this target, it will make the Fed’s job easier. This is because inflation expectations often feed on themselves.
Financial markets are counting on consumer-price inflation to fall below 3% for the first time since 2021, while a Big Mac meal may cost $18 due to various factors such as labor shortages and supply chain disruptions caused by the pandemic.