Journal Article
High and Volatile Inflation Begets a More Volatile Business Cycle
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.
JEL Classification: J62; I24; I28; N32;
https://doi.org/10.29338/ph2026-05
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Bibliographic Information
Provider: Federal Reserve Bank of Atlanta
Part of Series: Policy Hub
Publication Date: 2026-07-13
Volume: 2026
Issue: 5
Pages: 10