Inflation is falling without a recession. Can it last?

Macroeconomic optimists have found their gospel in the recent deceleration of consumer price inflation. With headline prints tumbling and the US economy continuing to generate over 200,000 jobs per month, proponents of the 'immaculate disinflation' thesis argue that price stability can be fully restored without the painful catharsis of a labour market recession. It is an enticing narrative, but one that ignores the underlying mechanics of cyclical adjustment.

The Exhaustion of Supply Healing

The initial phase of disinflation was driven by the post-pandemic unfreezing of global supply chains and the liquidation of bloated goods inventories. This was a supply-side gift that cooled prices without requiring aggregate demand destruction. However, that supply-side windfall has largely been consumed. Returning inflation from three per cent to two per cent requires disciplining services inflation, which demands either productivity miracles or labour market slack.

The painless phase of disinflation is drawing to an end; driving price growth back to target without triggering an economic contraction requires a degree of institutional luck central banks rarely enjoy.