Even if the Federal Reserve had started raising interest rates nine months earlier, US inflation would not be lower today than it is now.
That’s the result of simulations using a new Bloomberg Economics model, according to analysis released Wednesday by David Wilcox, director of U.S. economic research at Bloomberg.
The exercise suggested that the consumer price index would have been 5.9% higher in the first quarter of 2023 compared to a year earlier if the Fed had started raising its benchmark rate in the second quarter of 2021. , rather than the first quarter of 2022. This represents little difference from the actual increase of 5.8%.
“Even if the Fed had reacted much more quickly, we would have had the worst inflation spike since the 1970s,” Wilcox wrote. “To completely avoid the inflation problem, according to the model, the Fed would have had to put the economy through a very deep recession.”
Further on, the model’s inflation forecast under the alternative “take-off” scenario more or less matches Bloomberg Economics’ inflation forecast through the end of 2025.
Where an earlier take-off would have made some difference, according to the model’s simulation, was in 2022. The exercise indicated that inflation would have peaked at around 7.6% in the third quarter of last year in up from 8.6% in the second quarter.
“It’s not a trivial difference – but it’s not a game-changer either,” Wilcox said.