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The cure for inflation is on the way

 1 year ago
source link: https://finance.yahoo.com/news/the-cure-for-inflation-is-on-the-way-214337802.html
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The cure for inflation is on the way

Rick Newman
·Senior Columnist
Wed, October 12, 2022, 6:43 AM·4 min read

Worrywarts have been blabbing about a recession since the spring, when U.S. GDP growth turned slightly negative and Russia’s invasion of Ukraine sent oil prices soaring. Now it looks like the naysayers might get their way.

Economic forecasters are cutting their outlook for U.S. and global economic growth, with more of them predicting a recession. S&P Global Market Intelligence recently cut its forecast for the U.S. economy in 2023 from 0.9% GDP growth to a 0.5% decline. “Thebase forecast now includes a mild recession starting in the fourth quarter of this year, with an anemic recovery taking hold in third quarter of next year,” S&P says.

Capital Economics recently downgraded its outlook and also thinks the U.S. is headed for a mild recession. Moody’s Analytics puts the odds of a recession within 12 months at 60%. Beyond the United States, Europe may be headed for a deep downturn as it grapples with soaring energy prices caused by Russia’s war in Ukraine. Some economists think a global recession is coming, too, with total world output declining.

Nobody should want a recession, which puts people out of work and threatens livelihoods. But recessions have an upside: They often fix imbalances in the economy, including those that may have caused the recession in the first place. And if there is a recession, it will go a long way toward lowering inflation, which is one of the most destabilizing forces in U.S. and global economies right now.

In the United States, inflation, currently at 8.3%, has forced the Federal Reserve into its most aggressive monetary tightening cycle since the early 1980s. By jacking up interest rates and tightening the money supply in other ways, the Fed makes borrowing more expensive, which crimps spending by businesses and households. Over time, decelerating demand for goods and services ought to lower prices.

It can happen faster if there’s a recession, whether the Fed itself causes a downturn or there’s some other cause. The Consumer Price Index has fallen during or immediately after every recession since 1950, sometimes by a lot. On average, the inflation rate has fallen by 2.2 percentage points from the month a recession began through the month one year after it ended. When inflation has been high, the declines have been larger.


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