Inflation has caused significant hardship for households and businesses in recent years, but Americans are optimistic that the annual increase in prices will return to pre-pandemic levels. The latest evidence supporting this optimism comes from a four-times-a-year survey by the Cleveland Federal Reserve of business leaders. According to top executives, they expect the rate of inflation to decrease to an average of 3.4% using the consumer price index (CPI) in the next 12 months.
The CPI has already shown a decline, with the rate of inflation in the 12 months that ended in December at 3.4%, and it is expected to drop to 2.9% in the January report, which will be released on Tuesday morning. While a better measure of future inflation is somewhat higher, the core CPI, which excludes food and energy, stood at a 12-month rate of 3.9% at the end of December.
A long-running survey of consumers also shows that Americans expect inflation to continue to slow down towards pre-pandemic levels. Households expect an average inflation rate of 2.9% for the next year, according to consumer sentiment data. What both surveys indicate is that inflation expectations are “well anchored,” meaning nobody expects inflation to move much from current levels up or down.
The Fed wants inflation to reach its target of 2% annually but is not yet there. However, if consumers and businesses both believe it will succeed in achieving this goal, it will make the central bank’s job easier since expectations often influence themselves whether high or low.