The US economy's elusive soft landing is coming into view

The U.S. economy is approaching what most economists had thought either unlikely or impossible: inflation returning to its prepandemic norm without a recession or even much economic weakness, a so-called soft landing. “What we are expecting now is a soft landing," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. “We expect the economy to weaken quite a bit but it does look like we’ll avoid an outright contraction" in gross domestic product.

- David Harrison

Six months ago, the consensus among economists surveyed by The Wall Street Journal was that the economy would enter a recession over the next 12 months. In October’s survey, the average forecast of economists was for no recession. After Tuesday, the probability appears to have dropped further. That, at least, seems to be the verdict of investors who sent stocks up sharply and Treasury bond yields down on news that inflation was surprisingly docile in October.

If they’re right, it would be highly unusual. In the past 80 years, the Federal Reserve has never managed to bring inflation down substantially without sparking a recession.

The strong economic rebound following the pandemic pushed inflation to four-decade highs of 9.1% last year. In response, the Federal Reserve raised interest rates to a range between 5.25% and 5.5%, the highest level in 22 years. The Fed aims for 2% annual inflation using a different measure, the personal consumption expenditures price index.

October’s report, released Tuesday, showed inflation had come down to 3.2%. More encouraging, over the five months ended in October core inflation, which excludes food and energy, ran at a 2.8% annual rate, spitting distance from 2% and well below the 5.1% annual pace in the first five months of the year.

The big drop happened while employers continued to add jobs and and without any obvious sign economic growth was petering out.

In September, the Fed expected core inflation as measured by the PCE price index to end the year at 3.7%. Now, it appears it could fall to 3.4%, according to Omair Sharif, president of Inflation Insights, a research firm.