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Why did inflation rise and fall so rapidly? Lessons from the Korean War

Author

Listed:
  • Joseph E. Gagnon

    (Peterson Institute for International Economics)

  • Asher Rose

    (Peterson Institute for International Economics)

Abstract

The speed of both the rise and fall of US inflation in 2021-23 took many economists by surprise. This paper shows that the rise of COVID era inflation reflects three independent shocks: a plethora of pandemic-related shifts in demand patterns and supply disruptions; the largest commodity price surge in 40 years caused by the Ukraine war; and strong monetary and fiscal responses to the pandemic, which kept labor markets tight. The authors document the transmission of these shocks through the main components of private consumption: durable goods, nondurable goods, and services. The rapid fall of inflation reflects the credibility of the Federal Reserve's commitment to low inflation, something that was not apparent during the inflationary shocks of the 1970s but that was important during the Korean War inflation of 1950-51. Another similarity with the Korean War episode is the temporary surge in demand for durable goods.

Suggested Citation

  • Joseph E. Gagnon & Asher Rose, 2025. "Why did inflation rise and fall so rapidly? Lessons from the Korean War," Working Paper Series WP25-1, Peterson Institute for International Economics.
    • Handle: RePEc:iie:wpaper:wp25-1
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    File URL: https://www.piie.com/publications/working-papers/2025/why-did-inflation-rise-and-fall-so-rapidly-lessons-korean-war
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    More about this item

    Keywords

    durable goods; nondurable goods; services; pandemic inflation;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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