US inflation is down considerably from a four-decade high reached nearly two years ago. Now, as the Federal Reserve faces the final stretch of its historic inflation battle, a bigger pool of workers could slow inflation even further.

That would also improve the chances of a
“soft landing,” an extremely rare scenario in which inflation is tamed without triggering a recession.

“A big part of the story on inflation has been supply,” San Francisco Fed President Mary Daly said recently at the annual National Association for Business Economics policy conference. “The supply-side surprise, if you will, has been the positive news on labor and productivity.”

America’s job market last year was solid, with employers hiring at a strong clip, unemployment remaining low and more workers trickling back into the workforce.

Labor force participation, or the share of the working-age population that is employed or actively seeking a job, dropped off sharply in the beginning of the Covid-19 pandemic for reasons such as early retirements or people not working due to fears of contracting Covid. It began to recover shortly after, but participation jumped last year.

“We had tremendous growth in labor supply last year, and if you look at last year and 2022, those were the two strongest years of labor force growth in a row going back to the early 1980s,” Sarah House, senior economist at Wells Fargo, told CNN.

“That was hugely important in reducing pressure on wages and labor costs, but at the same time, allowing employers to hire therefore putting more money in consumers’ pockets,” she said.

There is still room for improvement, economists say, but it’s not clear if those gains will be enough to tug inflation all the way to the Fed’s 2% target.

“I think that the labor force story can last through 2024. It will not be as strong as it was in 2023 and 2022, but nevertheless, we think that will help pull inflation lower,” Michael Gapen, chief US economist at Bank of America, told CNN.

It took some time for workers to return from the sidelines, and throughout 2021, economists theorized why some people weren’t back at work, blaming excess pandemic savings or a deterioration of work ethic.

“The job search process itself is not frictionless; it may take workers some time to find a good job,” The White House’s Council of Economic Advisers explained in an analysis last year. “Also, if households adapted to the pandemic in