Year-over-year inflation, as measured by the consumer price index (CPI), hit a four-decade high of 9.1% in June. But by October, it had slowed to 7.7%. 

Investment banks and economists expect the trend of slowing inflation to continue, but that prediction will be put to the test this week with the release of November’s CPI data and the Federal Reserve’s latest interest rate decision. 

Jefferies’ chief financial economist Aneta Markowska told Fortune that she expects Tuesday’s CPI report to show year-over-year inflation falling to 7.2% in November. Inflation will continue dropping next year as well, she said, but warns it might not reach the Federal Reserve’s 2% target without some “pain.”

“I think that inflation will slow, very linearly and then it will plateau,” Markowska said, arguing some inflation is already baked into the labor market as evidenced by hourly wages growing at a 7.8% annual rate last month.

The Fed faces a “tradeoff” between persistent inflation and a recession after it failed to raise interest rates last year when consumer price increases first became a problem, she explained.

“Avoiding pain is not an option here. That’s just not on the menu,” she said. “What is on the menu is, ‘Do we want a little bit of pain very quickly [a recession]? Or do we potentially wait and then deal with more pain down the road [persistent inflation]?’”

Markowska has company in warning that falling inflation may be insufficient to prevent the U.S. economy from a recession. Here’s what other top investment banks, economists, and analysts expect from this week’s CPI report, the Fed, and the U.S. economy.

What to expect from the CPI report: A cooler November 

Inflation hit consumers’ wallets hard this year, but 2023 will likely offer some relief. 

Morgan Stanley chief U.S. economist Ellen Zentner said in a Friday research note that lower used and new car prices—as well as transportation, medical, and shelter costs—should reduce year-over-year CPI inflation to 7.3% in November.

With Americans shifting their spending from goods to services like travel as pandemic restrictions fade worldwide, Bank of America chief U.S. economist Michael Gapen also predicted that year-over-year inflation declined to 7.3% last month. However, in a Thursday research note, he said that shelter inflation—which is based on rent prices and how much homeowners would pay to rent their homes—could “remain sticky until sometime next year.” 

Such shelter inflation is measured with a lag, so despite falling home prices that component of CPI may remain elevated. And food prices, which rose 10.9% from a year ago in October, will also remain high, according to the economist—partly because of high logistics, storage and wage costs.

Goldman Sachs chief economist Jan Hatzius said in a Sunday research note that he expects year-over-year CPI inflation of 7.2% in November partly due in large part to lower gasoline prices. The average price for a gallon of gas peaked at $5.01 in June, but in the months since, it has tumbled 34% to just $3.26, according to the American Automobile Association.

Hatzius forecasted a 3% decline in used car prices, a 1% drop in apparel prices, and a 1% drop in hotel prices in November’s inflation data. However, he also anticipated a 2% rebound in airfare prices.

The future of the Fed’s inflation fight

While most investment banks are cautiously optimistic about Tuesday’s CPI report, all eyes will be on the Federal Reserve and Chairman Jerome Powell on Wednesday. Powell will raise interest rates this week and into next year, even if CPI data reveals that inflation is falling, experts told Fortune.

“The Federal Reserve will raise interest rates again, for the seventh meeting in a row, but appears poised to raise rates by one-half percentage point rather than the super-size three-quarters percentage point move at each of the last four meetings,” Bankrate.com’s chief financial analyst Greg McBride said. “While the Fed will move at a more typical pace, they will still be raising interest rates now and into 2023…at a more customary pace.”

Danielle DiMartino Booth, CEO and chief strategist of the economic research firm Quill Intelligence, also expects the Fed to raise rates by 50 basis points on Wednesday. 

“It’s still a sizable hike that will continue to wreak havoc on interest-rate-sensitive sectors such as housing and autos,” she said. “A half-point rate hike is double the pace at which markets had become accustomed to before Jerome Powell wielded his wrecking ball earlier this year in an effort to slow out-of-control inflation.”

DiMartino Booth, who spent nine years at the Federal Reserve Bank of Dallas, believes investors shouldn’t focus particularly on the rate decision. Instead, they should keep their eyes on Powell’s Wednesday press conference and his tone, which is critical to gauging what will happen next in the markets.

It all comes down to “which Jerome Powell shows up,” DiMartino said—“a kind, gentle, and scripted dove prepared to pivot or a hawkish Powell who isn’t afraid to jolt markets.”

If Powell is seen by investors as dovish, then stocks could rise. But if he’s seen to be hawkish, it’s another story. 

For now, the money is on Powell to be more hawkish, or as Jefferies’ Markowska put it, “less dovish” than during recent meetings. DiMartino even warned that Fed officials are ready to “wring out the excesses” from markets with interest rate hikes, despite inflation’s recent drop. 

Too little, too late

Markowska and DiMartino Booth both worry the Fed can no longer achieve a “soft landing”—where inflation is tamed without sparking a recession.

“Hopes for a soft landing have been dashed,” DiMartino Booth said, arguing that the job market is beginning to show cracks, with initial jobless claims and layoffs rising. “The Fed’s efforts have already pushed the U.S. economy into recession.”

DiMartino Booth also argued that “sticky housing inflation” will keep inflation high next year, which means the Fed will be forced to continue raising rates, increasing the odds of “global financial crisis.”

Markowska didn’t go so far to predict a “global financial crisis,” but she expects the Fed will probably “cause quite a bit of damage to the economy.” Some investors have been lulled into a “false sense of security” due to inflation falling since June, she said, warning that a recession is likely.

“The problem is that, even if they [the Fed] don’t have any intention of putting the economy in a recession…the desire to avoid something doesn’t mean that they’ll actually successfully avoid it,” she said. 

Markowska added that “at some point” the Fed will be forced to acknowledge a need to push the unemployment rate substantially higher than its current 4.4% 2023 year-end target. Doing so through additional interest rate hikes would help the Fed slow the economy and reduce inflation to its 2% target, but it would come at a high cost.

“It’ll be a very difficult political environment for Powell,” Markowska said. “He’ll get a lot of pushback.”