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Falling Prices Point to Soft Landing for Economy

woman grocery shopping

The latest data from the Commerce Department reportedly adds to the indicators that inflation in the United States is approaching the Federal Reserve’s target.

In November, prices fell for the first time since 2020, providing reassurance that the U.S. economy can avoid a recession while bringing prices under control, The Wall Street Journal (WSJ) reported Friday (Dec. 22).

This development is boosting Americans’ spirits and indicating that the Federal Reserve’s fight against inflation is yielding positive results, according to the report.

According to the Commerce Department, the personal-consumption expenditures price index, which is the Fed’s preferred inflation measure, declined 0.1% in November compared to the previous month, the report said. This is the first decline since April 2020.

Prices were up 2.6% on a year-on-year basis, which is not far from the Fed’s 2% target, per the report. Core prices, which exclude volatile food and energy costs, rose just 1.9% on a six-month annualized basis, indicating that the Fed is making progress toward reaching its target.

It was reported in November that prices were coming down, with some retailers saying inflation has eased in a number of categories.

Consumer sentiment has improved significantly, with the University of Michigan’s measure rising 14% to a five-month high in December, according to the WSJ report. This increase in confidence is attributed to households’ expectations for lower inflation in the coming year.

Consumer spending also showed positive growth, with a 0.2% increase in November compared to the previous month, the report said. This indicates that Americans have regained confidence in the economy and are willing to spend.

The decline in inflation and the positive consumer sentiment are contributing to the resilience of the U.S. economy, per the report. Despite the Fed’s tightening policy, which raised interest rates to the highest level in 22 years, the economy has avoided a recession.

The labor market has remained strong, although job additions and wage gains are easing, according to the report. The labor-force participation rate is also trending near the highest rate in more than two decades, making it easier for employers to find workers and preventing excessive wage growth that could drive up inflation.

Economists predict that the U.S. economy will experience a gradual slowing in 2024, allowing inflation to soften further, the report said. BMO Capital Markets expects growth to cool to 1% in the fourth quarter of 2024 compared to the same period in 2023.

This slowdown, combined with the Fed’s efforts to maintain price stability, is expected to result in a soft landing for the economy, where inflation returns to the Fed’s target without a recession, per the report.