The US economy is on a knife’s edge, potentially already in a recession after a second quarter of shrinking activity. But indicators are mixed, fueling uncertainty about the way forward.
The US economy is on a knife’s edge, potentially already in a recession after a second quarter of shrinking activity. But indicators are mixed, fueling uncertainty about the way forward.
At the core of the debate among economists and policymakers is a fundamental question with massive implications for America’s future: Which is worse — inflation, or a recession?
No one seems to agree on way or another.
By aggressively raising interest rates, the Federal Reserve is making a big wager that recession is worth the risk if it takes the heat off of consumer prices, which are rising at their fastest pace in four decades.
But many economists and lawmakers are pushing back on that idea, arguing that the so-called cure of a recession would be far worse than the disease of inflation.
To be sure, the Fed would like to avoid both. It’s aiming for a “soft landing” in which it hikes interest rates juuuust enough to slow demand without choking it off completely. That would be the ideal outcome, though the Fed itself admits the prospect of sticking the landing is getting increasingly difficult.
“The Fed’s actions to date do not guarantee a recession, but they have already made one more likely,” wrote Josh Bivens, the director of research at the left-leaning Economic Policy Institute, in a blog post earlier this month.
That leaves us with two potential outcomes: More inflation of the kind we’ve seen over the past year, or a recession that brings prices down while likely raising unemployment and crimping wage growth.
Bivens is firmly in the “high inflation is bad but a recession is worse” camp. That’s largely because of what a recession does to the labor market. “A recession actually means your economy is on average poorer,” he told CNN Business.
Inflation clearly eats into people’s wages, and that’s a bad thing. (Consumer prices rose around 9% last month on annualized basis, while wages rose 5.
