DEEP DIVE: Is Divine Disinflation Possible?

Is disinflation possible without an economy-wide recession? History shows that inflation rarely falls on its own without a recession (Fig. 3).

But we don’t think history necessarily has to repeat itself (despite how often it rhymes). While the inflation rate tends to peak before recessions, the yield-curve spread tends to turn negative at about the same time as recessions, signaling that monetary policy is getting restrictive enough to trigger a financial crisis—which usually has taken the form of a widespread credit crunch and recession (Fig. 4).

What seems to be different this time (so far) is that the credit system is less vulnerable to a credit crunch than it was in the past. The result is what we now have: a rolling recession hitting different sectors of the economy at different times; we expect it to bring inflation down without precipitating an economy-wide downturn. In his July 27 presser, Fed Chair Jerome Powell said that the Fed might succeed in going down that path. In his August 26 speech, he suggested that it was less likely than he had thought only a month previously.

Now, consider the following related developments: