Back to the Future? Lessons from the 'Great Inflation' [July 28, 2022]   [open pdf - 805KB]

From the Document: "The aggressive tightening of monetary policy under Volcker came with the tradeoff of relatively high unemployment that recovered slowly. During the recession of 1981-1982, inflation decreased by over 6 percentage points while unemployment increased by over 3 percentage points and stood at 10.8% in November 1982. Some economists argue that low inflation expectations and the Fed's [Federal Reserve's] credibility on inflation could not have been restored if it had not kept rates high despite rising unemployment. Since inflation has risen, the Fed has repeatedly pledged that it is 'strongly committed to returning inflation to its 2% objective.' If individuals find this pledge credible and inflation expectations remain low, then inflation might be reduced relatively quickly without triggering a recession. If not, inflation may remain high for an extended period of time, at which point a more serious economic slowdown could become necessary to lower inflation. (See CRS [Congressional Research Service] Insight IN11963, 'Where Is the U.S. Economy Headed: Soft Landing, Hard Landing, or Stagflation?') Unlike the situation that Chair Volcker faced, inflation expectations may remain low and stable today because inflation has been high for only about a year and was preceded by decades of low inflation. The extent to which inflation expectations remain anchored depends in large part on whether, going forward, the Fed is willing to raise interest rates as much as is necessary to rein in inflation. Since the Fed believes it can reduce inflation without triggering a recession, its resolve has not yet been tested."

Report Number:
CRS In Focus, IF12177
Public Domain
Retrieved From:
Congressional Research Service: https://crsreports.congress.gov/
Media Type:
Help with citations