A prominent financial journalist noted that multiple key indicators for the U.S. economy are improving simultaneously, with inflation cooling, employment remaining resilient, and growth staying robust. A soft landing appears closer than ever before, though it is not yet assured.
Recent data reinforces the narrative of inflation declining without a recession. A Friday inflation report showed core prices, excluding food and energy, rose 2.5% year-over-year in January, the lowest level since the inflationary surge began in 2021. Separate data from Wednesday indicated the unemployment rate fell to 4.3% in January, with job gains of 130,000, surpassing expectations.
However, positive data does not equate to mission accomplished. Core inflation remains near 3%, having risen from the low of 2.6% touched last April. The journalist pointed out that several analysts expect the disinflationary process to potentially slow or even stall above the 2% target this year as price increases from tariffs work their way from ports to stores.
The next steps for policy and markets are also highly sensitive. With the Fed Chair's term ending in May, a persistently strong economy could lead the White House to push for interest rate cuts. Furthermore, the policy direction of a potential successor could reshape the future path, focusing either on "consolidating gains" or pursuing "more ambitious goals through rate cuts."
The recent decline in inflation is more like a snapshot, with the 2% target not yet secured. The latest core inflation reading was partly influenced by a data gap from last fall's government shutdown, creating a "technical压低," but it still shows that the price pressures seen in the first months of the past three years, which disrupted disinflation narratives, did not reappear this year.
Simultaneously, the structure of inflation remains challenging. The report shows housing costs, a previous major driver of inflation, have cooled significantly. However, service prices excluding housing remain firm, and goods prices more sensitive to tariffs have accelerated. Excluding used cars, core goods prices rose at an annualized rate of 4.4% in January, the fastest pace in three years. Analysts suggest this indicates automakers are beginning to pass more costs onto consumers after absorbing tariff impacts in 2025.
The concern among Fed officials has shifted from "re-acceleration" to "stalling at elevated levels." A Federal Reserve Bank President stated last month that she would not declare victory on a soft landing, emphasizing that "inflation needs to get to 2%, we're not done yet." Her projection is for monthly inflation readings to align with 2% only by year-end.
While the job market appears stable on the surface, underlying momentum is weakening. Annual revisions revealed that average monthly job growth for the full year 2025 was only about 15,000, lower than almost any non-recession year since WWII, with new jobs highly concentrated in healthcare and education. A chief economist noted that while the worst-case scenarios many feared did not materialize, the labor market is "objectively weak," and the unemployment rate is more likely to rise than fall this year.
The stability of the unemployment rate during the reporting period is largely because businesses are neither hiring aggressively nor conducting large-scale layoffs. However, this "fragile equilibrium" is not robust. Potential triggers include companies whose stock prices have significantly declined potentially resorting to cost-cutting measures like layoffs as AI reshapes industry landscapes.
Resilient consumer spending is both a support for the economy and a potential obstacle for the "last mile" of disinflation. Beyond employment, another key risk involves asset prices and consumption. Household wealth has been boosted by years of stock market gains; sustained market selling could lead consumers to pull back on spending, weakening a key growth engine. Conversely, some argue the greater risk to a soft landing comes from excessively strong consumption, which could keep inflation stuck above 2%.
A chief U.S. economist expressed some nervousness about the soft landing scenario precisely because overall household finances are healthy, with "wealth up almost across the board." He forecasts the unemployment rate falling to 4% this year while inflation remains around 2.8%, forming a "mirror image" of another economist's prediction. This economist also suggested that narratives about a "K-shaped economy," where spending by wealthy families masks vulnerabilities among lower-income groups, are overstated. While this is good news for economic expansion, it is not favorable for returning inflation to 2%.
Whether inflation continues to decline also depends on supply-side and policy variables. Several analysts expect limited room for inflation improvement this year as tariff-related price increases gradually pass through supply chains. Another chief global economist noted that AI-related capital expenditures contributed nearly 1 percentage point to economic output last year and could provide similar support this year.
This economist also mentioned that ahead of mid-term elections this fall, the administration has an incentive to pursue more expansionary fiscal policy and act more cautiously on trade, given that significant tariff hikes last April increased cost-of-living pressures. He projects inflation will be around 3% by year-end.
With this combination of growth and inflation, the "last leg" of monetary policy could be more difficult. While a soft landing is closer than many initially expected, it is not yet guaranteed. Furthermore, if the economy remains strong, the tension between the White House's potential desire for rate cuts and the Fed's commitment to its inflation target could become a core variable for market repricing.