Taming inflation could drive unemployment to 6%, bank says

Taming inflation could drive unemployment to 6%, bank says

Taming inflation could increase unemployment to 6%

Will the U.S. see a recession next year?

Some economists predict the U.S. will enter a recession next year

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Taming inflation could lead to much higher U.S. unemployment than what the Federal Reserve is expecting, Deutsche Bank analysts said on Monday.

The Fed’s battle against inflation is already proving painful for many Americans, who are grappling with a jump in borrowing costs due to the Federal Reserve’s ongoing rate hikes as well as the fiercest inflation in 40 years. In a note to clients, Deutsche Bank stated that prices will need to be controlled if the Fed’s projection of 4.4% inflation next year is not met.

In September, the jobless rate stood at 3.5% — the lowest since February 2020, or just before the pandemic slammed the economy and led to widespread job losses.

Following a series of interest rate hikes this year by Fed officials, the unemployment rate could rise as high as 6% next year, according to the Deutsche Bank forecast. Based on the country’s existing workforce of 164 million people, that implies a loss of roughly 4 million jobs between now and the end of 2023, by which the economists expect the U.S. will enter a recession.

Separately on Monday, a survey of business economists found that more than half think the country is likely to enter a recession in the next 12 months; 11% believe a downturn has already started, according to the National Association for Business Economists.

Prior to the pandemic, the last time the economy experienced a jobless rate of 6% was in 2014, when the U.S. was still recovering from the Great Recession. The Fed may not be aiming for a soft landing, so the pain required to bring down inflation could be quite severe.

“Our updated analysis continues to point to the need for a sharper rise in unemployment than embedded in the Fed’s latest projections for September,” Deutsche Bank noted.

Inflation to haunt Americans this holiday season as costs for travel, activities soar

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Under the Fed’s projection, about 1.2 million people would lose their jobs as the unemployment rate drifts up to 4.4%.

But actually pushing down inflation to the Fed’s goal of about 4% by the end of 2024 would require a bigger spike in unemployment than the central bank is anticipating, the Deutsche Bank economists believe.

A rise in joblessness can help curb inflation because the newly unemployed and their families typically cut back on spending. Employers don’t have to increase wages to attract talent because there is less labor market slack. This means that wage growth stagnates. Companies can stop raising prices without increasing pay. These trends should work together to reduce inflation, according to economic theory.

Of course, while this may work in theory, it would result in very real economic pain for thousands or even millions of U.S. households.

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