US Inflation Forecast for 2024 and Beyond: Analyst Expectations and Market Implications

KEY TAKEAWAYS

The U.S. inflation forecast for 2024 suggests a decrease, driven by easing energy prices and supply chain improvements.

The latest updates on U.S. inflation present a complex picture. However, despite ongoing economic anxieties, there’s a notable shift in some key metrics.

The Latest U.S. Inflation News & Developments

U.S. consumer sentiment declined for the fourth consecutive month in November. This downturn mirrors widespread concerns about the economy, especially with households bracing for higher inflation rates in the medium term.

The actual annual inflation rate in the U.S. was 3.2% for the 12 months ending in October 2023. This figure marks a decrease from the previous rate of 3.7%.

Factors Currently Influencing Inflation Rates

In October, U.S. consumer prices did not rise, signifying the smallest increase in underlying inflation in two years. This relative stability is attributed in part to lower energy costs, including fuel oil, gasoline, and utility gas, which have eased the overall burden on consumer expenses.

Smaller-than-expected increases in food, new vehicles, and shelter prices also played a role, while prices for used trucks and cars slightly decreased.

However, prices for transport, clothing, and medical commodities saw an increase. Overall, October’s core CPI was at 4% year-on-year and 0.2% month-on-month, both figures being lower than expected.

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Despite the recent slowdown in inflation, American households are expecting an uptick, projecting it to reach 4.5% over the next year. This expectation is up from 4.2% in October and 3.2% in September, as indicated by the University of Michigan’s consumer survey.

Global Conflicts and Trade Tensions

The Israel-Hamas conflict raises concerns about potential wider Middle-Eastern tensions, possibly impacting energy and other raw material prices. U.S. sanctions on Iran and possible retaliatory actions, including threats to the Strait of Hormuz, could further escalate these issues.

In addition, the ongoing U.S.-China tensions over semiconductors exacerbate inflationary pressures. The U.S. ban on exports of certain chips to China, including those by Nvidia and Intel, aims to limit their use in military or AI applications, adding to supply chain disruptions.

This mixed scenario underscores the challenges the U.S. faces in balancing inflationary pressures, consumer expectations, and market realities. While recent months have brought some relief, the public remains wary of potential cost increases in the near future.

US Inflation Rate Forecast for 2024 and Beyond

According to Statista, the U.S. inflation rate forecast may decrease from the current U.S. inflation rate of 3.2% to 2.3% next year. In 2025, it is likely to go down even further to 2.1% and from there to 2% for 2026 and 2027.

However, 2028 could see a slight rise once more, back to 2.1%.

Projected annual inflation rate in the United States from 2010 to 2028

Syed Mohammed Osama Rizvi, energy and macroeconomic analyst at Primary Vision Network, told Techopedia:

“The US inflation rate forecast is a tricky business, as there are multiple aspects to it. First of all, we need to take into account the chances of rate hikes. Many observers believe that there won’t be any more hikes and by June 2024, we might see the unwinding of the current monetary policy tightening.”

Rizvi goes on to elaborate: “I believe, given the unresolved geopolitical events, the likelihood of another spike in inflation remains high. Therefore the chances for more hikes still remain. Furthermore, the job market and consumer spending are still strong.”

“Thus, I don’t think that inflation is going to fall steeply in the next year. If there is a global recession, with major economies like the U.S. entering a slowdown by Q2 next year, we might see inflation tame down a bit. However, that will come at a price.”

Piero Cingaro, staff writer at financial news outlet Benzinga, suggests that “the Federal Reserve’s recent macroeconomic projections indicate a gradual reduction in inflation rates. These forecasts anticipate inflation to average 2.5% in 2024. It may then decrease to 2.2% in 2025 and align with the Fed’s 2% target by 2026.”

“The IMF’s latest World Economic Outlook projects a similar benign trajectory for inflation. It is expected to be at 2.3% in 2024, with a further decline to 2.1% by 2028. The market consensus appears to align with these U.S. inflation predictions. Current market-implied forward-looking inflation rates, known as the breakeven inflation rates, suggest an average inflation rate of 2.2%-2.25% over the next 5 to 10 years. These rates are consistent with averages seen before the pandemic.”

Cingari also notes that in the meantime, “a divergent perspective is observed among US consumers.”

“Recent data from the University of Michigan Consumer Survey shows a heightened concern about inflation. Consumer expectations for inflation over the next year have escalated to 4.4%, the highest since April. Similarly, the five-year inflation outlook among U.S. consumers has risen to 3.2%, a peak not observed since March 2011.

Deloitte outlines its U.S. inflation prediction into four potential scenarios in the near future. This includes a soft landing, a bumpy landing, a hard landing, and a crash landing.

  • Soft Landing

In case of a soft landing, the inflation rate in the US may come back to the Fed’s 2% target. However, this would happen without causing a recession. This is the best-case scenario, where essentially, economic conditions go back to how they were pre-pandemic. However, this is highly unlikely, given the current geopolitical situation.

  • Bumpy Landing

In case of a bumpy landing, inflation does manage to come down somewhat from its current 3.2%. However, it still does not quite reach the 2% target. This could be due to labor market issues. However, growth is still present, albeit a little slow.

  • Hard Landing

A hard landing could be caused by the U.S. Fed’s over-zealous monetary tightening policy. This could cause inflation to tank below the 2% target. This could also be spurred on by other factors, such as supply chain disruption.

Consumer demand could also be disappearing faster than previously thought.

  • Crash Landing

In case of a crash landing, the inflation rate in the U.S. does not come down. It still remains uncomfortably high due to a potential wage-price spiral as well as constant supply shocks.

Morningstar, on the other hand, sees U.S. expected inflation touching about 1.8% through 2024 to 2027. This is mainly due to supply disruptions calming down somewhat. Food, durable goods, and energy prices should also reduce dramatically over the next few years. If so, this will be below the U.S. Fed’s target and can cause a slowdown in the economy as well.

The U.S. Federal Reserve has outlined that further monetary policy tightening will negatively impact both households and the economy. Hence, it has highlighted that it will be watching for more economic data. These especially include labor market reports, financial and international developments, and inflation reports.

However, the Fed has reassured the public that the US banking system is resilient.

Learn More About U.S. Inflation

What is Inflation?

Inflation is the sustained increase in the prices of goods and services over time, typically measured quarterly or annually. This phenomenon can stem from various causes, including an expanded money supply, heightened demand, or external geopolitical events.

In particular, the escalating costs of essential commodities like food, raw materials, and energy can trigger inflation. These items are crucial for producing numerous other products, leading to widespread price hikes across the economy.

To manage inflation, central banks often implement tighter monetary policies, resulting in higher interest rates. They may also modify their balance sheets and adjust the currency supply as strategies to counteract inflation.

U.S. Inflation Rate History

From 1960 to 2022, the U.S. inflation rate generally remained low and well-managed, though it experienced occasional spikes. Significant increases occurred in 1970 (5.84%), 1974 (11.05%), and 1980 (13.55%), likely due to the oil crisis of the 1970s, exacerbated by escalating tensions between the U.S. and the Middle East, affecting energy and other goods prices.

However, since 2020, U.S. inflation has risen sharply and consistently, reaching about 6.8% by November 2021 and a 40-year high of 9.1% in June 2022. This surge was primarily attributed to the COVID-19 pandemic’s impact, along with escalating energy prices due to the Russia-Ukraine conflict and significant supply chain disruptions.

In response, the U.S. Federal Reserve has implemented a series of aggressive interest rate hikes over recent months. Similar actions were taken by other central banks, including the Bank of England and the European Central Bank, partly due to the spillover effect of U.S. inflation on the UK and EU economies.

The Fed predominantly increased interest rates in 0.50% increments, occasionally opting for 0.25% increases. However, in the last few months, it has maintained rates at 5.25%-5.50%, allowing time to analyze incoming economic data and determine future actions.

Monthly 12-month inflation rate in the United States from October 2020 to October 2023
Statista

This pause reflects both a faster-than-expected decrease in inflation and the growing proximity of the U.S. economy to a recession, necessitating a more cautious approach.

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Indrabati Lahiri

Indrabati has 4+ years of experience as a financial reporter and editor, mainly covering equities, investments, commodities, tech, emerging markets and macroeconomics. She has previously worked with Capital.com and IBM, and have recently launched Wealthier Moksha, which looks at stocks and investing, commodities, and emerging markets.