Geopolitical chaos, inflation and interest rates were the hot topics of 2022. As 2023 progresses, questions around inflation – in particular whether 2022 was the year of peak inflation or just the beginning of something more dramatic – will remain top of mind.
In a recent article we discussed how inflation impacts the stock market. Barring a few sectors and companies – inflation and rising interest rates – is generally considered to negatively impact stocks.
With that in mind, it’s worth looking at where a number of central banks, economic research providers, and executives think inflation is heading in 2023. Below we look at a few key perspectives worth keeping in mind as the year progresses.
Inflation outlook: the RBA
In November, the Reserve Bank of Australia (RBA) said they expected inflation to peak above 7% in 2022, before declining during the early stages of 2023.
Inflation did indeed peak above 7% – with a CPI reading of 7.8% for the month of December (2022) catching economists off guard and representing a 32-year high for Australia.
Amid these elevated inflation readings, the market continues to expect the RBA to keep raising interest rates in the year ahead. Following successive hikes in 2022, again hiked the official cash rate 25 basis points to 3.35% at the Jan / Feb meeting.
Off the back of these aggressive rate hikes, the RBA is forecasting inflation to come down significantly in 2023. By June the RBA expects inflation to reach 6 ¼% before falling to 4 ¾% in December.
‘Inflation is forecast to decline to around the top of the 2–3 per cent target band over coming years,’ said the RBA.
Inflation forecasts from the OECD tell a slightly different story. According to OECD Statistics and Projections, Australian inflation will hit 3.1% in the fourth quarter of 2023, before declining even further to 2.3% in the fourth quarter of 2024.
Inflation outlook: US Fed
Like the RBA, the US Federal Reserve kicked off an aggressive interest rate hiking program in 2022 in an attempt to curb inflation.
By the close of 2022, the Fed had raised interest rates 7 times, taking the fed funds rate from near zero to the 4.5%-4.75% range. As with the Australian market, investors continue to expect further rate hikes in 2023.
These rate hikes come as US inflation levels continue to moderate. The December CPI reading came in at 6.5% – marking the 6-month deceleration – though still firmly above the US Fed’s target range.
Looking further out and as with the Australian inflation outlook, by the fourth quarter of 2023 and according to OECD Statistics and Projections, US inflation is expected to come down to 3.1% and 2.3% in the fourth quarter of 2024.
Further out, the US Fed said it expects both total and core price inflation to be closer to its 2% target – suggesting that the long term view from the Fed is for the normalization of inflation rates.
‘Inflation is not done’
While many central banks – including the RBA and US Fed – expect to see inflation moderate in the coming quarters, it’s worth remembering that the US Fed spent much of 2021 arguing that inflation was transitory. That is, that inflation would go away.
Inflation has ultimately proved to be anything but transitory. As is, there are worries amongst analysts and economists that inflation might become entrenched in the economy.
Indeed, according to Standard Chartered’s CEO – Bill Winters – inflation is far from finished.
‘Inflation is not done,’ says Mr Winters.
‘We had the big energy price spike and we’re having the energy price decompression, partially, but underlying, the job market in the U.S. is still pretty strong, there are labor shortages around the world.’
Stay tuned for more updates on the inflation outlook as they emerge.
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