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High and Volatile Inflation Begets a More Volatile Business Cycle

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Abstract

Following five years of inflation above the Federal Reserve's 2 percent target, a pressing question for policymakers is: what are the macroeconomic consequences of inflation remaining persistently elevated? Drawing on historical lessons from the 1970s and a new theoretical framework, this paper shows that elevated and persistent inflation makes the economy more vulnerable to costpush shocks. When inflation is already high, a cost-push shock generates larger and more persistent inflation and a deeper output contraction than it would in an environment of low and stable inflation. The implication: low and stable inflation is not just a goal; it is itself a macroeconomic stabilizer.

Suggested Citation

  • Andrés Blanco, 2026. "High and Volatile Inflation Begets a More Volatile Business Cycle," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2026(5), pages 1-10, July.
    • Handle: RePEc:fip:a00068:103743
    DOI: 10.29338/ph2026-05
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    Keywords

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    JEL classification:

    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • N32 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - U.S.; Canada: 1913-

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