Inflation expected to fall in 2024

But the US economy has defied those pessimistic predictions. Inflation fell from 6.5% in 2022 to 3.7% in 2023, despite economic growth accelerating. We project inflation to continue to fall, averaging 2.4% in 2024 and then averaging just 1.8% over 2025 to 2028.

In terms of the exact timing, we expect core PCE to hit 2.0% year over year sometime in the first quarter of 2025.

Even while inflation normalizes, we expect the economy to avoid a recession, though we do expect a period of slightly weaker GDP growth (troughing in 2025). See our latest Economic Outlook for further details.

To be sure, a recession is still possible. It could happen if the Fed fails to loosen monetary policy sufficiently, or if another black swan-type event hits the economy or financial markets. But the key point is that we now know a recession is not necessary to normalize inflation.

How Did Inflation Fall Without a Recession?

Admittedly, the inflation pessimists had history on their side when they argued a recession would be needed to tame inflation. For example, to beat the Great Inflation of the 1970s, the Fed had to engineer a sharp recession in the early 1980s. Why have things turned out differently this time?

Like any economic phenomenon, inflation is explainable by supply and demand. Too much demand chasing too little supply of goods causes prices to rise.

When inflation peaked in 2022, demand certainly played a contributing role, but probably the biggest driver was on the supply side. The pandemic caused disruptions to the supply of energy, durable goods, and other areas, and that’s where prices rose the most.

These supply disruptions took longer to resolve than expected, but they did eventually resolve to a great degree. As the supply side recovered in 2023, we saw inflation come down fastest for the same kinds of goods where prices had risen fastest in 2022. This process is ongoing as of mid-2024.

The pessimists had assumed that the supply side wouldn’t recover in this manner, but instead the disruptions would be more enduring (akin to the oil price shocks of the 1970s). If supply hadn’t improved, the onus would’ve been on falling demand to reduce inflation. And the requisite drop in aggregate demand would’ve been consistent with a sharp recession.

What Is the Current Inflation Rate in the United States?

The Personal Consumption Expenditures Price Index, or PCE Index, which is our (and the Fed’s) preferred inflation measure, dropped from a peak of 7.1% year-over-year growth in June 2022 to 2.5% as of June 2024.

Core PCE inflation also stood at 2.5% as of June. Core inflation’s rise and fall was somewhat less dramatic than overall inflation because core inflation doesn’t include food and energy prices. Economists prefer core inflation as a better gauge of inflation’s underlying trend, which can be obscured by the volatility of food and energy prices.

Consumer Price Index inflation, which has some methodological differences with PCE, has fallen even more dramatically. It peaked at a higher rate (8.9%) owing to a higher weighting in energy. CPI inflation data posted 3.0% year-over-year growth in June 2024. It’s still running a bit higher than PCE inflation owing to its larger weight to housing, where inflation has been running hottest among major categories.