Would a recession be enough to crush inflation? History says yes, and big times. Let's look at the data together. A short thread. 1/
I went back 100 years and looked at all US recession (16) since then. The idea was to test whether recessions are able to: - Bring down inflation at all - If so, to which extent - How long would it take for CPI to stabilize back to 2% 2/
Here is what I found. In all 11 episodes when inflation was above 3%, a subsequent recession led to a marked slowdown in CPI. On average: - It took 16.2 months to slow inflation from peak to 2% - The peak-to-trough reduction in CPI was a big -6.8% 3/
Not all recessions are the same. The mid-70s recession materially slowed down CPI but only managed to bring it down to 4.9%. In a highly industrialized & labor-intensive economy with strong credit growth and wage bargaining power it can be hard to push down CPI. 4/
The common trait seems to be that big recessions (5%+ drawdown in cumulative GDP) are very time-effective in lowering inflation. In the 20s-30s and in 2008 it only took 7 months on average to push CPI down from the local peak to 2%. 5/
If we'd get the average recession today, history says we'd be able to lower inflation down from 9% to 2% in roughly 16 months. Big picture, recessions have been able to crush CPI with a 100% hit rate. 6/
Obviously, there is nothing to be happy about a recession. Credit conditions tighten materially, firms lose access to financing and the labor market & consumers are hit hard too. The Fed hopes for a soft landing, but a recession might be the price to pay to slow down CPI. 7/
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