High inflation in 2021 and 2022 has strained American household budgets and undermined the popularity of President Joe Biden. But it slowed at the end of 2023, a faster improvement than economists expected. This reinforces the hope of a soft landing for the American economy.

Will the improvement continue in 2024? That’s the question.

To adjust their forecasts, economists try to determine where, exactly, the recent deceleration in inflation is coming from. It seems to come from less pressure on the price of goods (clothing, used cars, etc.) and on the cost of services (travel, among others), despite the increase in rents which is slow to occur. flex.

These trends seem to point to more disinflation, but we can also detect some persistent risks. Let’s take a look at it all.

What is happening today in the United States is called “disinflation” in economists’ jargon: if we compare today’s prices to those of a year ago, we see that they are increasing a lot slower. For example, in the summer of 2022, prices were increasing at an annual rate of 9.1%. In November, it was 3.1%.

Rent, car repairs and groceries remain more expensive than in 2019. (Wages have also increased and have grown faster than prices in recent months.) Their prices are still rising, but less quickly .

The US Federal Reserve wants to bring price increases back to a slow and steady pace, consistent with a healthy, not overheating, economy. Like other central banks around the world – including the Bank of Canada – the Fed defines this as an annual inflation rate of 2%.

Inflation surprised economists in 2021 and 2022 by rising sharply, then remaining high. By mid-2023, it ran out of steam, falling much faster than revised forecasts.

By mid-2023, the Fed expected a key measure of inflation, personal consumption spending, to finish the year at 3.2%. According to the latest data released in November, it had fallen to 2.6%. The measure of the consumer price index has also fallen rapidly.

This surprisingly rapid decline was first seen in travel prices, notes Omair Sharif, founder of Inflation Insights. With regard to air fares in particular, it is the increase in supply that has played a role.

Demand remained strong, but after years of limited capacity, supply finally caught up. In addition, the price of kerosene has fallen. The prices followed. Other travel-related prices, such as hotels, increased quickly in 2022, but much more slowly starting in mid-2023.

Then, it was the prices of goods that moderated inflation in the United States. After sharp increases for two years, the prices of certain goods (furniture, clothing, used cars, etc.) have increased much more slowly, or even fallen.

In fact, we are still expecting – and hoping – for marked disinflation in rents.

Rents jumped at the start of the pandemic, but their inflation then slowed sharply. Many economists believe this slowdown will eventually show up in official inflation data as tenants renew their leases or sign new ones. But this process takes time.

Of course, this does not mean that the American economy and the Fed bankers are out of the woods.

The fall in fuel prices has helped slow down general inflation and that of other prices, such as those of plane tickets. But fuel prices are notoriously volatile. If unrest in producing regions triggers an unexpected rise in energy costs, stamping out inflation will be much more difficult.

But in fact, perhaps the most immediate risk is that the significance of the sharp slowdown in inflation towards the end of 2023 has been overestimated.

In recent years, year-end price figures have been revised upwards. Additionally, January inflation data showed increases, in part because some companies raise prices at the start of the year.

“We should expect some ups and downs,” said Mr. Sharif, referring to a series of new inflation calculations expected on February 9 which should provide a clearer picture of the recent slowdown in inflation.

However, the general trend in inflation appears to be downward, adds Sharif.

This could lead to an interest rate cut from the Fed, which has signaled the possibility of lowering borrowing costs several times in 2024.

“There is not much upside risk anymore, in my opinion,” Mr. Sharif concludes.