It's looking more likely that any recession next year will be shallow and manageable

• Inflation rose 7.7% year-over-year in October, slowing down from the previous month.
• This shows the Fed's aggressive efforts to fight inflation might be working.
• That's good news for a potential recession next year that won't be as bad as many might expect.

Even if a recession does come next year, it probably won't strain Americans' wallets as much as anticipated.

The latest inflation data on Thursday brought some good news for the economy — the Consumer Price Index, which measures inflation, rose 7.7% year-over-year in October. That's a slowdown from the year-over-year increase of 8.2% in September, and below the 8.0% increase economists surveyed by Bloomberg expected to see.

And core CPI, which excludes volatile food and energy prices, saw a year-over-year increase of 6.3% in October, below September's year-over-year increase of 6.6%.

Inflation is undoubtedly still high — but it is slowing down, and the Federal Reserve can rest a bit easier knowing its strategies to fight soaring prices are working. Up until this point, the central bank has been hiking interest rates aggressively to slow down the economy, but this latest data means that they could soon slow the pace of those hikes.

That would put less pressure on the broader economy, and any potential recession will be mild, or avoided altogether. It paves way for the economy to enter a "soft landing," as the US combats inflation but avoids a recession.

"It's just one month, and we've seen months like this before, but this is exactly what we want to be seeing," Mike Konczal, director of Roosevelt Institute's macroeconomic analysis team, wrote on Twitter following Thursday's inflation report.

"Core inflation right at the CPI target, driven by both deflation in goods and services declining," Konczal added. "This is what a soft landing would look like." 

This inflation data comes amid concerns of a looming recession, and debates on how bad of an economic downturn it will truly be. For four consecutive meetings now, the Federal Reserve has acted aggressively to lower soaring prices in the country by hiking interest rates 0.75 percentage points, in the hope that raising those interest rates will slow the economy and lead it toward a soft landing, in which the Fed can combat inflation while still avoiding a recession.

While a recession could come in 2023, the latest inflation data shows the Fed's strategy might be working and it won't be as dramatic as many might expect. The labor market continues to be strong — the US added 261,000 payrolls in October — and the economy's gross domestic product grew at an annualized rate of 2.6% in the third quarter of 2022, bouncing back after two consecutive quarters of mild contraction in the first half of the year.

Wage growth also has been moving closer to what the Fed likely wants to see. Average hourly earnings have continued to increase month after month, but year-over-year increases aren't as high as they once were earlier this year. While wages are still increasing faster than they were before the pandemic, the data doesn't show the kind of acceleration that would lead to a wage-price spiral and really bad, highly entrenched inflation.

Given the strong economic data, Treasury Secretary Janet Yellen recently said that "this is not an economy that's in recession and we continue to do well," and in Wednesday remarks, President Joe Biden told reporters that "we're not anywhere near a recession right now, in terms of the growth."

"But I think we can have what most economists call a 'soft landing,'" he added. "I'm convinced that we're going to be able to gradually bring down prices so that they, in fact, end up with us not having to move into a recession to be able to get control of inflation."

Any recession that comes will be mild

As Insider previously reported, a 2023 recession will look unlike any recession Americans have recently experienced, and the latest inflation data and strong jobs report bolster that sentiment. 

Eric Rosengren, former president of the Boston Federal Reserve, told CNBC that "it's quite likely that the US has a mild recession next year," and David Kelly, chief global strategist at JPMorgan Asset Management, similarly told Insider that a recession would be mild if there is one.

The mild nature the next recession is set to take will likely be in the form of a growth recession, defined as a shallow contraction that keeps a strong labor market, meaning the country would not feel the pain of a full-blown economic downturn. While the economy could experience "some pain," as Powell previously said, job losses won't be as significant and the Fed's efforts to lower prices will remain intact.

And looking forward, declining inflation levels are likely to shape the Fed's December decision on hiking interest rates. While many Democratic lawmakers have criticized the central bank for going too hard in fighting rising prices due to its potential to lead to a stream of job losses, it's now looking more likely the Fed will consider a smaller interest rate hike of 0.5 percentage points next month.

"At some point it will become appropriate to slow the pace of increases," Fed Chair Jerome Powell said during the November press conference. "So that time is coming, and it may come as soon as the next meeting or the one after that."