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A recession to tame inflation?

So why didn’t the 1970s recessions “cure” inflation? First, each downturn was relatively short-lived. Sudden price spikes cut spending power, but then real incomes bounced back. In today’s context, this is (sort of) good news because it points to a soft patch rather than a deep slump. The second reason the recessions of the 1970s did not alleviate inflation is that workers secured higher wages even as the economy deteriorated. This effectively replaced one source of cost-push inflation (commodities) with another (labour). The whole episode is synonymous with “wage-price spirals”, essentially a power struggle between labour and capital. Productivity declined and society spent the next decade trying to figure out who should bear the burden of this adjustment, until neoliberalism (Thatcherism, Reaganomics, etc.) provided a definitive answer – by crushing worker power. Up to that point, a young militant workforce was able to resist any sustained real-wage squeeze. And, at least for a period in the late 1970s, the private sector borrowed heavily and reduced its saving, which also delayed the moment of pain.

New Fed Paper Finds Surging Home Prices Driven by Demand — Not Supply - Bloomberg

“We estimate that a one percentage point increase in the mortgage rate lowers housing demand by 10.4 percent,” the authors write. “This is a larger demand sensitivity to rates than evidence using purely observable housing market variables suggests.”

New Fed Paper Finds Surging Home Prices Driven by Demand — Not Supply - Bloomberg

“Fluctuations in housing demand explain much more of the variation in home sales and price growth than do fluctuations in housing supply,” Elliot Anenberg  and Daniel Ringo, both Fed board economists, write. “Fluctuations in demand explain essentially all of the variation in home sales, and 80% of the variation in prices, between 2002-2021.”

Note to the Federal Reserve: Don’t Panic About Inflation | The New Yorker

The details of the inflation report provide some evidence to back up these arguments, but also some evidence that is less supportive. The price of medical services rose by 0.6 per cent last month, the cost of domestic services (such as housecleaning) rose by 0.9 per cent, and the cost of haircuts and other personal-care services jumped by 1.2 per cent. These were significant rises. However, taking the services sector over all (less energy services), prices jumped by 0.4 per cent in January, compared with 0.3 per cent in December, and 0.4 per cent in October. That doesn’t look like a sudden takeoff.

The great demographic reversal and what it means for the economy | LSE Business Review

The great demographic reversal and the retreat from globalisation will bring back stronger inflationary pressures – this is our highest conviction view. Worsening dependency ratios naturally raise inflation. The lesser availability of labour at home and abroad will serve to restore the (previously diminished) bargaining power of labour. It will also end up raising the equilibrium natural rate of unemployment. Households will save less, and invest more in housing, than some mainstream models suggest.  The non-financial corporate sector may have to invest more to hold down unit labour costs, though we are agnostic about the various causes for recent low investment rates. But we doubt that politicians, facing rising health and pension costs, will be prepared or able to raise taxes enough to equilibrate the economy via fiscal policy.

There Never Was a Real Tulip Fever | History | Smithsonian

The Dutch learned that tulips could be grown from seeds or buds that grew on the mother bulb; a bulb that grows from seed would take 7 to 12 years before flowering, but a bulb itself could flower the very next year. Of particular interest to Clusius and other tulip traders were “broken bulbs”—tulips whose petals showed a striped, multicolor pattern rather than a single solid color. The effect was unpredictable, but the growing demand for these rare, “broken bulb” tulips led naturalists to study ways to reproduce them. (The pattern was later discovered to be the result of a mosaic virus that actually makes the bulbs sickly and less likely to reproduce.) “The high market price for tulips to which the current version of tulipmania refers were prices for particularly beautiful broken bulbs,” writes economist Peter Garber. “Since breaking was unpredictable, some have characterized tulipmania among growers as a gamble, with growers vying to produce better and more bizarre variegations and feathering.” After all the money Dutch speculators spent on the bulbs, they only produced flowers for about a week—but for tulip lovers, that week was a glorious one. “As luxury objects, tulips fit well into a culture of both abundant capital and new cosmopolitanism,” Goldgar writes. Tulips required expertise, an appreciation of beauty and the exotic, and, of course, an abundance of money.

U.S. Payrolls Rise as Jobless Rate Drops to Six-Year Low

The last time payrolls increased at least 200,000 for as many months was a stretch that ended in March 1995.