A US productivity boom may explain how inflation slowed amid a strong economy

Americans may experience a historic economic event: inflation returning to normal without a recession, known as a ‘soft landing.’ This positive outcome may be attributed to recent productivity growth. Strong productivity in the US last year allowed for wage gains without passing the costs to consumers, as workers produced enough to cover higher labor costs. Productivity is measured by dividing goods and services produced by hours worked, and it increased by 2.7% in Q4 2023. The reasons behind this productivity growth include the potential impact of generative artificial intelligence and preparations for a recession that never occurred. Good productivity levels are important for economic and inflation considerations. The Federal Reserve takes productivity into account when making policy decisions. Monitoring productivity is challenging due to difficulties in measuring services and the frequent revisions of data. While it remains to be seen if last year’s productivity surge is a transformative shift in the US economy, some expect improvements in productivity due to generative tools to contribute to disinflation over time.