Bank of America sees inflation falling to this number by the end of next year—but it’ll take a recession to get there

Mario Tama/Getty Images

Inflation has been a thorn in the side of the Federal Reserve and the Biden administration for more than a year, but Bank of America’s chief U.S. economist Michael Gapen says the worst of the price hikes are over.

Gapen argues that year-on-year inflation, as measured by the consumer price index (CPI), will sink to just 3.2% by the fourth quarter of next year. That’s quite the drop from June’s 9.1% peak, and October's 7.7% figure.

“We expect core CPI inflation to moderate rapidly over the course of 2023 as supply-chain disruptions ease further, inventories recover, and labor market conditions weaken,” Gapen wrote in a recent research note.

But don’t get too excited. Gapen also believes that it will take a “mild” recession for inflation to fall, which means the unemployment rate will peak at 5.5% next year compared to 3.7% in October.

“Our outlook for a mild recession in the U.S. economy is driven by weaker investment and consumer spending,” he wrote. “We think the headwinds of a weaker labor market, higher borrowing costs, tighter credit standards, and weaker balance sheets will lead consumers to reduce spending.”

Gapen isn’t the only Wall Street economist arguing that inflation is on its last legs and a recession is coming.

Deutsche Bank chief economist David Folkerts-Landau also believes Fed officials will “succeed in their mission” of taming inflation. He sees CPI falling to 3.9% by the end of 2023 and argues a “moderate” recession will be the price Americans must pay for stable prices.

“Our expectation for a recession in the US by mid-2023 has strengthened on the back of developments since early last spring,” he wrote in a Monday research note.

Despite the Fed’s six interest rate hikes this year, and President Biden’s Inflation Reduction Act, inflation continues to be the most pressing issue for a majority of Americans. But most economists believe it will fall without a severe recession.

Jeffrey Roach, LPL Financial’s chief economist, pointed to the Conference Board’s November consumer confidence survey as evidence that a recession could be on the way. U.S. consumer confidence declined to a four-month low this month, while inflation expectations rose to the highest level since July.

“The weakening trend in confidence foreshadows a recession which will likely happen in the coming year,” Roach told Fortune.

But like Gapen, Roach believes that any recession will be “short and shallow” due to the tight labor market.

Of course, not every economist agrees. Mohamed El-Erian, president of Queens’ College at the University of Cambridge and the former CEO of PIMCO, has warned that inflation could get “stuck” at 4% and argued that too many of his peers are convinced that a “short and shallow” recession is the most likely outcome for the U.S. economy.

El-Erian called on economists to be “more open-minded” when discussing the probability of a recession and its potential severity.

“[T]hey are confidently asserting that this recession will be ‘short and shallow’ and are encouraging us again to ‘look through’ a major development,” he wrote in a Financial Times op-ed. “I worry that this could constitute a repeat of the analytical and behavioral traps that featured in last year’s ill-fated inflation call and whose consequences we are yet to put behind us.”

This story was originally featured on Fortune.com

More from Fortune:

The American middle class is at the end of an era

Sam Bankman-Fried’s crypto empire ‘was run by a gang of kids in the Bahamas’ who all dated each other

The 5 most common mistakes lottery winners make

Sick with a new Omicron variant? Be prepared for this symptom