It is difficult for the Fed to balance inflation control and recession avoidance = former Fed Chairman Bernanke & Blanchard

Ben Bernanke, a former US Federal Reserve (Fed) chairman and senior researcher at the Brookings Institution, presented a paper with PIIE senior researcher and economist Olivier Blanchard on the causes of US inflation during the pandemic period.

This paper breaks down the sources of inflation during the pandemic period and obtained the conclusion that “labor market tensions did not contribute much to inflation in the early stages.” With this conclusion, it is possible to explain that inflation skyrocketed under a situation where the Phillips curve is flat. Early stage inflation is mainly in the goods market, and it is a sharp rise in the prices of some commodities and commodity prices in industries where supply is restricted. Then, as commodity market prices stabilize and supply chains normalize, it is said that the importance of the goods market will decline among the components of inflation, and there is a possibility that the labor market will become more dominant.

According to this paper, it is anticipated that inflation will rise moderately in the future since the slump in the labor market is below a sustainable level. It is said that it is unlikely that the Fed will avoid a slowdown in the economy while returning the inflation rate to the target level.