{"id":37614,"date":"2022-09-20T03:03:04","date_gmt":"2022-09-20T03:03:04","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=37614"},"modified":"2022-09-21T20:16:45","modified_gmt":"2022-09-21T20:16:45","slug":"will-a-recession-kill-inflation","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2022\/09\/20\/will-a-recession-kill-inflation\/","title":{"rendered":"Will a recession kill inflation?"},"content":{"rendered":"

There is plenty of evidence to suggest that recessions cause a sharp fall in the consumer price index. Alfonso Peccatiello<\/a> recently analyzed US recessions over the past century and concluded that they caused an average drop in CPI of 6.8%.<\/p>\n

\"MacroAlf:<\/p>\n

A recession no doubt reduces inflation but it does not necessarily kill underlying inflationary pressures. It took massive pain inflicted by the Volcker Fed in the early ’80s to reverse the long-term up-trend in inflation. Average hourly earnings (gray) is a better gauge of underlying inflation as can be seen on the graph below.<\/p>\n

\"CPI,<\/p>\n

Recessions cause a fall in earnings growth but do not interrupt the underlying trend unless the economy is administered a severe shock. In the early 1980s, it took four recessions in just over a decade, a Fed funds rate (gray below) peaking at 22% in December 1980, and unemployment (blue) spiking to 10.8%.<\/p>\n

\"Fed<\/p>\n

In the current scenario, we have had one recession, but cushioned by massive fiscal stimulus and Fed QE. Another recession would be unlikely to break the up-trend in underlying inflation unless there is a sharp rise in unemployment.<\/p>\n

A study by Larry Summers and Olivier Blanchard<\/a> maintains that unemployment will have to rise above 5% in order to tame inflation. The chart below suggests that unemployment may need to rise closer to 10% — as in 1982 and 2009 — in order to kill underlying inflationary pressures.<\/p>\n

\"Unemployment(U3)<\/p>\n

Conclusion<\/h2>\n

We are not suggesting that the Fed hike rates sufficiently for unemployment to reach 10%. That would cause widespread destruction of productive capacity in the economy and take years, even decades, to recover. Instead, we believe that the Fed should tolerate higher levels of inflation while Treasury focuses expenditure on building infrastructure and key supply chains, to create a more robust economy. Largely in line with Zoltan Pozsar’s four R’s<\/a>:<\/p>\n

(1) re-arm (to defend the world order);
\n(2) re-shore (to get around blockades);
\n(3) re-stock and invest (commodities); and
\n(4) re-wire the grid (to speed up energy transition).<\/p>\n

An early Fed pause, before inflation is contained, would drive up long-term yields and weaken the Dollar. The former would cause a crash in stocks and bonds and the latter would increase demand for Gold and other inflation hedges.<\/p>\n

A weaker Dollar would make US manufacturing more competitive in global markets and reduce the harm being caused to emerging markets. Unfortunately, one of the consequences would be higher prices for imported goods, including crude oil, and increased inflationary pressures.<\/p>\n

The US Fed and Treasury are faced with an array of poor choices and in the end will have to settle for a strategy that minimizes long-term damage. In an economic war as at present, higher inflation will have to be tolerated until the war is won. An added benefit is that rapid growth in nominal GDP, through high inflation, would reduce the government’s precarious debt burden.<\/p>\n

\"Federal<\/p>\n

Acknowledgements<\/h4>\n

Alfonso Peccatiello<\/a> for his analysis of CPI and recessions.<\/p>\n","protected":false},"excerpt":{"rendered":"

There is plenty of evidence to suggest that recessions cause a sharp fall in the consumer price index. Alfonso Peccatiello recently analyzed US recessions over the past century and concluded that they caused an average drop in CPI of 6.8%. A recession no doubt reduces inflation but it does not necessarily kill underlying inflationary pressures. … <\/p>\n

Continue reading “Will a recession kill inflation?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[46,3761,13,34],"tags":[5638,315,854,5273,1828,2880,5535],"class_list":["post-37614","post","type-post","status-publish","format-standard","hentry","category-deficit-spending-employment","category-gdp-and-activity","category-inflation-economy","category-us-canada-countries-regions","tag-alfonso-peccatiello","tag-average-hourly-earnings-growth","tag-cpi","tag-federal-debt-gdp","tag-inflation","tag-recession","tag-unemployment-u3"],"yoast_head":"\nWill a recession kill inflation? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Will a recession kill inflation? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"There is plenty of evidence to suggest that recessions cause a sharp fall in the consumer price index. 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What is concerning that monthly core CPI is climbing, reaching an annualized rate of 5.4% (0.45% pm) in February. 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Unemployment climbed slightly, to 6.06 million but lags a long way behind job openings (10.72 m), indicating a tight labor market. There has been speculation, however, that employers were hanging onto employees, rather than letting them go as\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"Unemployment & Job Openings","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-11-04-u3-jolts.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-11-04-u3-jolts.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-11-04-u3-jolts.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":48393,"url":"https:\/\/thepatientinvestor.com\/index.php\/2024\/02\/14\/markets-stung-by-up-turn-in-monthly-cpi\/","url_meta":{"origin":37614,"position":2},"title":"Markets stung by up-turn in monthly CPI","author":"Colin Twiggs","date":"February 14, 2024","format":false,"excerpt":"The S&P 500 dropped to 4953 as markets reacted to an up-turn in monthly CPI inflation numbers. Reversal in the Russell 2000 Small Caps ETF (IWM) was especially sharp, retreating below support at 200, as investors re-assessed market risk. Ten-year Treasury yields climbed to 4.32%, breakout above resistance to indicate\u2026","rel":"","context":"In "Gold & Precious Metals"","block_context":{"text":"Gold & Precious Metals","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/gold-commodities\/gold-precious-metals\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-02-13-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-02-13-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-02-13-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":46382,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/12\/13\/commodities-flag-global-recession-threatening-usts\/","url_meta":{"origin":37614,"position":3},"title":"Commodities flag global recession, threatening USTs","author":"Colin Twiggs","date":"December 13, 2023","format":false,"excerpt":"Long-term bonds and stocks are in a bull-trend but commodities warn that the global economy is tipping into recession. The November CPI report shows underlying inflation sticking at 4.0%, suggesting that the Fed will be reluctant to cut rates, but they may be forced to if a global recession disrupts\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"10-Year Treasury Yield","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-12-13-tnx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-12-13-tnx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-12-13-tnx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":41631,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/13\/inflation-ebbs-and-flows\/","url_meta":{"origin":37614,"position":4},"title":"Inflation ebbs (and flows)","author":"Colin Twiggs","date":"April 13, 2023","format":false,"excerpt":"The consumer price index (red below) declined sharply to 5.0% for the 12 months to March, compared to 6.0% in February. But core CPI increased slightly to 5.6%, from 5.5% one month earlier. Monthly core CPI was softer, at 0.38%, but the rate seems to be steadying at around 0.4%,\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"CPI & Core CPI","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":25976,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/05\/24\/hourly-wages-warn-of-rising-inflation\/","url_meta":{"origin":37614,"position":5},"title":"Hourly wages warn of rising inflation","author":"Colin Twiggs","date":"May 24, 2021","format":false,"excerpt":"Which is the best measure of inflation: average hourly earnings or the consumer price index (CPI)? The chart below shows CPI and average hourly earnings adjusted to the same base point in January 1964. At times, CPI lags behind average hourly wage growth -- as in the 1970s -- but\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/37614","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=37614"}],"version-history":[{"count":1,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/37614\/revisions"}],"predecessor-version":[{"id":37617,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/37614\/revisions\/37617"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=37614"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=37614"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=37614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}