In a surprising turn of events, the annual inflation rate plummeted to 2.7% last month, catching many economists off guard. While some experts urge caution, suggesting that this trend may not be sustained, there is growing optimism that we could see the inflation rate align with the Federal Reserve’s target of 2% by year-end.

The initial 2.7% figure was primarily attributed to declining food and energy prices. However, when we strip out these volatile components, the annualized inflation rate decreased to 2.6% last month. This indicates that the drop in inflation is not merely a result of falling energy and food prices but rather reflects a broader reduction in inflation across various sectors. This is certainly encouraging news.

Thanks to the administration’s policies, domestic oil production is on the rise, nearing an impressive 14 million barrels per day. Last September, the administration successfully urged OPEC to increase production, contributing to oil prices sliding close to $55 per barrel.

As a result, gasoline prices at the pump are expected to continue their downward trend. The administration even suggests that oil could dip to $50 per barrel by year's end, potentially bringing gas prices down to the $2.50 range. This translates to lower energy costs for both consumers and businesses, which will in turn help reduce inflationary pressures.

Some economists caution that this drop could be an anomaly influenced by insufficient data collection due to government shutdowns. While it is true that the lack of data could skew results, the Bureau of Labor Statistics (BLS) based its measurements on data from September when government operations were fully functional. Although the two-month period may clarify why November saw such a significant decline, there was still enough data to support the findings.

This downward trend will likely continue since each of the causes for the inflation is being eliminated or minimized. What caused the inflation problem which started in January 2021?

In December 2020, the annual inflation rate stood at a modest 1.4%. Yet, from January 2021 to June 2022, the inflation rate surged to a staggering 9.1%. Three major factors contributed to this unprecedented increase.

First, the federal government accumulated massive deficits, which significantly boosted demand and drove prices upward. The 2020 deficit hit a staggering $3 trillion, which was a response to the nationwide shutdown that resulted in an unemployment spike to 13%.

In 2021, despite an economy growing at a robust 6% rate, the government racked up another $3 trillion deficit, overstimulating the economy and further fueling inflation.

Secondly, the decision to curtail energy production in January 2021 sent energy prices spiraling and further fueled inflationary trends.

Lastly, throughout the period from January 2021 to June 2022, the Federal Reserve maintained near-zero interest rates and expanded the money supply through its bond-buying program, which also contributed to inflation.

In 2026, the government has managed to eliminate or significantly reduce all three major causes of inflation. Current policies promote increased energy production and lower energy prices, while the Federal Reserve has raised interest rates to dampen demand and phased out the bond-buying program. Presently, interest rates are still in a restrictive range, effectively curbing inflationary pressures.

Moreover, the federal deficit is now being systematically reduced. Last year's deficit reached $1.8 trillion, but projections suggest it will decrease to $1.4 trillion this year, mostly because of the administration’s cutting government spending wherever Congress and the opposition will allow. The administration is also increasing tax revenue through the recently imposed tariffs.

Additionally, the administration has taken proactive steps to boost overall supply within the economy. This, too, will exert downward pressure on inflation. By eliminating counterproductive regulations and incentivizing business investment, the focus is on fostering a more conducive environment for growth.

One of the most significant changes is the implementation of 100% expensing of investments in the year the investment is made. Previously, businesses had to depreciate their investments over many years, sometimes as long as 25 years. This new policy allows businesses to recover their investments rapidly, freeing up capital for expansion.

With these strategies in play, GDP could potentially grow by as much as 5% next year.  This large increase in supply will reduce inflation.

The recent inflation figure of 2.7% is not just a fleeting anomaly; it may signal the beginning of a continuous downward trend. By year-end, we could witness the annual inflation rate tumble to 2%, and hopefully, we can finally put this inflation challenge behind us for good.

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Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.