Disinflation, interest rates and the unemployment rate

We look at past episodes of disinflation in the United States and the euro zone and at how much interest rates and the unemployment rate had to rise to trigger them. We see that a 1 percentage point fall in core inflation requires: An increase in the central bank’s interest rate of 130 to 170 basis points in the United States and 120 to 200 basis points in the euro zone; A rise in the unemployment rate of 1 to 1.6 percentage points in the United States and 0.9 to 2.5 percentage points in the euro zone. Today, core inflation has to be reduced by 3 percentage points in the United States and 2 percentage points in the euro zone, leading to an increase in short-term interest rates of at least 400 basis points in the United States and at least 250 basis points in the euro zone, and a rise in the unemployment rate of at least 3 percentage points in the United States and at least 2 percentage points in the euro zone.