Many factors, such as inflation, dollar strength, and unemployment rate will influence the cost of living. In 2022, grocery, housing, utilities, transportation, and miscellaneous costs all saw upward trends. While an increase is expected the coming year, the extent is yet to be seen. Here are the factors that affect the extent of cost of living increase in 2023:
Interest rate hikes and Inflation
2022 saw a record 7 interest rate hikes, only short to 2005’s 8 hikes. The last time interest rates were raised and cut 7 times was back in 2008. In March 2022, the Federal Reserve increased the target range for the federal funds rate from 0.25% to 0.50%. Similarly, May, June, July, September, November, and December saw further increases, with the current, December rate standing at 4.50%. If in 2023 the Federal Reserve continues to hike the interest rate, it will result in an increase in cost of living. And looking at the current cost-push inflation, and especially after Zelensky’s recent meeting, signaling that the war in Ukraine is not going to end soon, this seems to be a likely scenario. Disrupted supply-chains and higher costs of production can be expected to follow, leading to an increase in cost of living.
The US dollar
The USD has been running riots in the international markets 2022. Since the start of this year, it has seen appreciation against most major currencies, especially the Euro and the British Pound. The Federal Reserve’s policy of hiking the interest rate has been the major factor behind this. When the US dollar is strong, goods made in America become more expensive for international buyers. This does not directly have an impact on cost of living, as a strong dollar firstly means that the purchasing power of the US consumer is higher. But still, it can indirectly influence cost of living. For example, if the USD appreciates too much, the stock market can suffer, like we’re seeing right now, leading to a decrease in the wealth of American citizens. In fact, 58% of Americans report owning a stock. Cost of living not only increases when prices of goods and services increase, but also when their purchasing power decreases. If the 2022’s wall street decline continues in 2023, we may see an increase in cost of living.
Employment
The unemployment rate in the US is projected to reach almost 4.5 percent in 2023 from November 2022’s 3.7%. It is an strong indicator of the cost of living increase in 2023. If the unemployment rate rises, which is likely in the current economic climate, it will lead to a decrease in demand for goods and services, leading to lower prices. Now, lower prices are generally good news for the consumer. But if it is a result of unemployment, it can lead to a decrease in the purchasing power of the consumer, and hence an increase in cost of living. That’s because when the consumer has less money to spend, they end up buying less, leading to lower demand and lower prices. But in the first place, the consumer has less money, so the overall cost of living simply increases.
Bottom Line
People in the US are working more to cope with inflation. Any cost of living increase in 2023, regardless of the extent, will make it harder for citizens to make ends meet. True, the year 2023 is yet to be seen. But with inflation, interest rate hikes, a strong US dollar, and a projected rise in unemployment rate, an increase is expected. Active monitoring of the market i.e. analyzing the factors that affect cost of living, is essential.
