Economy booms, but prices keep climbing

‘Soft landing’ hopes shift to concerns of continued churn with jobs, wages and inflation all still expanding

The United States seemed headed for an economic fairy-tale ending in late 2023. The painfully rapid inflation that had kicked off in 2021 appeared to be cooling in earnest, and economic growth had begun to gradually moderate after a series of Federal Reserve interest rate increases.

But 2024 has brought a spate of surprises: The economy is expanding rapidly, job gains are unexpectedly strong and progress on inflation shows signs of stalling. That could add up to a very different conclusion.

Instead of the “soft landing” many economists thought was underway — a situation in which inflation slows as growth gently calms without a painful recession — analysts are increasingly wary the U.S. economy is not landing at all. Rather than settling down, the economy appears to be booming as prices continue to climb more quickly than usual.

A “no landing” outcome might feel pretty good to the typical American household. Inflation is nowhere near as high as it was at its peak in 2022, wages are climbing and jobs are plentiful. But it would cause problems for the Federal Reserve, which has been determined to wrestle price increases back to their 2% target, a slow and steady pace that the Fed thinks is consistent with price stability. Policymakers raised interest rates sharply in 2022 and 2023, pushing them to a two-decade high in an attempt to weigh on growth and inflation.

If inflation gets stuck at an elevated level for months on end, it could prod Fed officials to hold rates high for longer in an effort to cool the economy and ensure that prices come fully under control.

“Persistent buoyancy in inflation numbers” probably “does give Fed officials pause that maybe the economy is running too hot right now for rate cuts,” said Kathy Bostjancic, chief economist at Nationwide. “Right now, we’re not even seeing a ‘soft landing’ — we’re seeing a ‘no landing.’ ”

On Wednesday, Fed policymakers received a fresh sign the economy may not be landing quite as smoothly as hoped. A key inflation report showed prices picked up more than expected in March. The consumer price index measure hovered at 3.8% on an annual basis after food and fuel costs were stripped out. After months of coming down steadily, that inflation gauge has lingered just under 4% since December.

While the Fed officially targets a separate measure of inflation, the personal consumption expenditures index, the fresh report was a clear sign price increases remain stubborn. Days earlier, the March jobs report showed employers added 303,000 workers, more than expected, as wage growth stayed strong.

The combination of strong growth and sticky inflation might say something about the state of the U.S. economy, which at any given moment can be in one of four situations, said Neil Dutta, head of economics at Renaissance Macro, a research firm.

The economy can be in a recession, when growth falls and eventually pulls inflation lower. It can be in stagflation, when growth falls but inflation remains high. It can be in a soft landing, with cooling growth and inflation. Or it can experience an inflationary boom when growth is strong and prices rise quickly.

At the end of 2023, the economy appeared to be headed for a benign slowdown. But these days, the data are less moderate and more volatile.