Why did inflation rise and fall so rapidly? Lessons from the Korean War

Joseph Gagnon and Asher Rose ()
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Asher Rose: Peterson Institute for International Economics

No WP25-1, Working Paper Series from Peterson Institute for International Economics

Abstract: The speed of both the rise and fall of US inflation in 2021-23 took many economists by surprise. This paper shows that the rise of COVID era inflation reflects three independent shocks: a plethora of pandemic-related shifts in demand patterns and supply disruptions; the largest commodity price surge in 40 years caused by the Ukraine war; and strong monetary and fiscal responses to the pandemic, which kept labor markets tight. The authors document the transmission of these shocks through the main components of private consumption: durable goods, nondurable goods, and services. The rapid fall of inflation reflects the credibility of the Federal Reserve's commitment to low inflation, something that was not apparent during the inflationary shocks of the 1970s but that was important during the Korean War inflation of 1950-51. Another similarity with the Korean War episode is the temporary surge in demand for durable goods.

Keywords: durable goods; nondurable goods; services; pandemic inflation (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-cis, nep-his and nep-mon
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