Cleveland Fed: Banking sector distress has little-to-no impact on inflation
Distress in the banking sector typically reduces the credit supply and GDP growth, but it doesn’t have an impact on inflation, according to a new report from the Center for Inflation Research at the Federal Reserve Bank of Cleveland.
There are virtually no differences in the path of the Consumer Price Index in the years before and after large declines in bank equity prices in advanced economies, despite the significant impact those large declines have on the credit supply and GDP.
“These findings suggest that the collapse of several regional banks in early 2023 would not, on its own, put downward pressure on inflation,” writes research economist Ina Hajdini.
Why not? Previous research shows that, in the wake of banking stress, some firms raise prices to preserve liquidity, mitigating downward pressure on inflation from reduced economic activity.
Phillips curve logic would suggest that reduced economic activity would reduce inflation, “but this line of thinking may not be consistent with the evidence,” Hajdini writes.
Read the Economic Commentary: Implications of Bank Equity Price Declines for Inflation
More on inflation: The Center for Inflation Research
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Chuck Soder, email@example.com, 216-672-2798