Layoffs and high unemployment lead to lower inflation over the next two years

  • High interest rates fight inflation by encouraging companies to cut expenses – often at the expense of jobs.
  • An economist who served under Obama expects an average unemployment rate of 6.5% to reach desired levels of inflation.
  • This would reflect the current trend in which companies are scrambling to hire workers, not fire them.

It seems that inflation in the United States is so peakedBut we’re not out of the woods yet. Struggling to bring down soaring price growth could mean a tough two years for job seekers – a tough axis of power they enjoyed during the Great Resignation.

This is according to new paper From the Brookings Institution, which predicts that a high unemployment rate will be necessary to combat inflation. Inflation is usually inversely related to unemployment. The rule says: When unemployment goes down, inflation goes up, and when unemployment goes up, inflation goes down.

Currently, the Federal Reserve expects the national unemployment rate to reach 4.1% In 2024, but the Brookings Institution argues that the Fed will need to pay it “significantly higher” in order to bring inflation down to its 2% target, which it wanted by the end of 2024.

“We find that this unemployment trajectory returns inflation to near the Fed’s target only under optimistic assumptions,” the researchers wrote in the paper. “Under the less moderate assumptions about these factors, inflation remains well above target unless unemployment rises by more than the Fed projects.”

Because of this view, Jason Furman, former chair of the Obama White House Council of Economic Advisers, called this “the scariest economic paper of 2022.”

he is Wrote In an opinion piece for the Wall Street Journal this week, based on findings from the Brookings Institution, the Fed will need to be firm about raising interest rates even if unemployment continues to rise. By his own calculations, Furman says the US will need an average unemployment rate of about 6.5% in 2023 and 2024 to reach the 2% inflation target. In August, the unemployment rate was about 3.7%, according to the Bureau of Labor Statistics. And depending on the job market, he said, or other supply-related factors, “the outlook can be even more dire.”

Among some of the Fed’s suggestions, Foreman says it should lower its forecast for the economy, such as targeting an inflation rate of 3% above 2%.

“While fighting inflation should be the central bank’s sole focus today, the Fed must at some point re-evaluate the meaning of victory in this struggle,” he said.

Job loss may be necessary to lower inflation

Foreman’s 6.5% projection is based on the assumption that, in addition to the Fed’s aggressive fight against inflation, the labor market will also calm slightly on its own, with jobs reduced to two-thirds of their pre-pandemic number. It also assumes that inflation expectations will return to what they were before COVID, and that the price of gas will return keep falling.

What that means 6.5% is that the next year and a half will do Property Many layoffs, in addition to constant price hikes and exorbitant borrowing.

Economists and the Federal Reserve say this is a necessary burden.

“While higher interest rates, slower growth, and weak labor market conditions will lower inflation, they will also bring some pain to households and businesses,” Fed Chairman Jerome Powell said during the conference. August 26 statements. “But failure to restore price stability will mean much more pain.”

This would reflect the trend the job market has seen during the pandemic, Ben Wenk of Insider mentioned This month. The latest data from the Bureau of Labor Statistics Offers That job opportunities still exceed the number of available workers by a ratio of two to one, which extends the trend of severe imbalance in the labor market.

In the recent past, Americans were dealing with high inflation while experiencing high wage increases, even if those increases weren’t entirely keep up with inflation for most people. The next challenge will be dealing with the reverse scenario, where companies are looking to lay off employees rather than hire them.

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