Among the drivers of U.S. inflation, in addition to of a stronger pickup in services—especially the a tight labor market, 2022 saw the lagged impact stickier component of shelter inflation—will keep of supply constraints resulting from pandemic- inflation from falling back quickly. We see era dynamics pushing inflation higher (Figure I-16). inflation by the end of 2023 settling at 3%, which As we step into 2023, early signs of a recovery in is higher than the Federal Reserve’s inflation goods supply and softening demand could help target of 2%. In other words, we do not see balance supply and demand for consumption inflation returning to target next year. goods and bring prices lower. But expectations FIGURE I-16 Inflation has proved more persistent because of COVID-related shocks and the shelter component % Forecast Other oo s  Other serces COVID  (suppl shocs Shelter  Core C­I  –         Notes: The COVID supply shocks component includes subcomponents that faced extreme supply bottlenecks and demand shocks during peak COVID, namely transportation services and vehicles. Other goods includes apparel, household furnishings, and recreational goods. Other services includes health care, education and communication, recreational services, and other services. Energy price shocks are not directly included in transportation services but are indirectly included through higher airfares. Shelter inflation is the component that captures the effect of shelter costs in the overall CPI. Shelter includes prices for both renters and homeowners. For renters, shelter inflation measures both rent and utility payments. For homeowners, the BLS calculates what it would cost to rent a similar house. Sources: Vanguard calculations, based on data from the Bureau of Labor Statistics, as of October 31, 2022. 21