In recent weeks, the Bureau of Labor Statistics has made a series of announcements that have made me more optimistic about America’s economic prospects in 2023. On January 6, the Bureau of Labor Statistics (BLS) reported that the economy added a healthy 223,000 jobs in December, while the unemployment rate declined slightly to 3.5 percent.

A week later, the BLS announced that prices actually fell slightly between November and December. The annual inflation rate for December was 6.5 percent, the lowest it’s been since October 2021.

Then on Wednesday, we learned that the situation is similar for the producer price index, which measures costs faced by businesses. It fell a surprisingly large 0.5 percent between November and December, while the annual inflation rate for producers was 6.2 percent. And on Thursday, the Labor Department announced that there were 190,000 new unemployment claims filed last week—the lowest number of new claims in several months.

In short, we’re seeing two salutary trends at the same time: inflation is coming down, while the job market continues to boom.

This wasn’t supposed to happen. When the Fed began raising rates last March—and especially after the Fed started raising rates in large 0.75 percent increments in June—a lot of economists assumed that this would push the US economy into a recession. By August, even Fed Chair Jerome Powell seemed to be expecting the worst. In a widely-discussed speech, he warned that the Fed’s rate hikes were likely to lead to “slower growth” and “softer labor market conditions,” and bring “pain to households and businesses.”

He didn’t use the word “recession,” but everyone knew what he meant.

But it’s starting to look like inflation might come back down without a recession or significant job losses. Last month’s 223,000-job gain was the smallest in two years, but it was still above the roughly 200,000 new jobs we need each month to keep pace with population growth. And today’s unemployment rate of 3.5 percent is as low as it’s been at any point since 1969.

It’s too early for Powell to take a victory lap. The inflation situation is fluid, and the inflation rate could start to creep back up in the coming months. But it now looks like there’s a real possibility that the recession everyone was dreading in 2023 won’t happen. We might get an “immaculate disinflation” instead.

A complex inflation picture

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