Wall Street's dream of 'immaculate disinflation' is becoming reality and the economy is doing a lot better than people think, Nobel economist Paul Krugman says

• "Immaculate disinflation" is becoming a reality, according to Nobel economist Paul Krugman.
• Inflation coming down without sparking a recession is a dream scenario for Wall Street.

Wall Street's dream scenario is becoming a reality – and despite gloomy sentiment in pockets of the market, the economy is actually doing way better than people think, according to Nobel laureate Paul Krugman.

The top economist recently pointed to promising signs that inflation is on the downtrend. Prices cooled to a yearly pace of 3.2% in October – well-below the highs recorded last summer, when inflation touched 9.1%.

But slowing inflation hasn't triggered a rise in unemployment or the start of a recession, pushing Wall Street closer to its dream scenario. Though some areas of the economy are slowing, the US job market has remained resilient, with the unemployment rate clocking in at 3.9%, still close to a historic low. GDP also saw blowout growth of 5.2% last quarter, according to a revised estimate from the Commerce Department this week.

Those indicators run contrary to bearish voices in the market, who warn that the economy is on the precipice of recession and inflation still risks spiraling out of control.

"Sorry folks, but 'immaculate disinflation' – rapidly falling inflation without a recession or a rise in unemployment– is actually happening," Krugman said in an op-ed for the New York Times on Wednesday.

By and large, the economy also appears to be better off than it was a few years ago. Though some argue that the US economy has been less robust since President Joe Biden took office, that assessment hinges on pandemic-fueled distortions in economic data, Krugman said, such as transitory price increases as demand surged, and transitory falls in wage growth as low-wage workers returned back to work.

By now, wage growth has actually more than kept pace with inflation, with average hourly earnings rising 4.1% in October.

"While the public's negative view of the economy is a major puzzle, acknowledging that puzzle is no reason to soft-pedal the evidence that the US economy is currently very well – indeed, much better than even optimists expected a year ago," he added.

Investors are warming up to the prospect of a soft-landing and are generally expecting another positive year of returns for stocks in 2024, since cooling inflation should give the Fed room to loosen monetary policy sometime in the middle of the year. Lower rates could ease up pressure on equities, with Bank of America, RBC Capital Markets, and Deutsche Bank among the voices on Wall Street who are calling an all-time-high for the S&P 500 next year.