The above chart shows the Federal Reserve's Discount Rate for the 1950s. Note that in the middle and end of the decade we see the Fed increasing rates to such a degree that they create a recession. Then we see the Fed lower rates during the recession to spur growth. This is what most people think of when they think of "recession and recovery."
That being said, let's take a look at inflation in the year 1950, as it explains the increase in the discount rate.
PPI continued to increase on a YOY rate, eventually reaching nearly 15%, while CPI continued to escalate as well, eventually hitting hear 6%. So -- what caused these price increases?
1.) Massive demand. PCEs increased at incredibly strong rates for the first three quarters of the year. This led to a classic case of demand pull inflation. Food prices were a big reason for the increase (which increased 4.8% from December 1949 to November 1950), as was an increase in house hold furnishings (which increased 9.1% from December 1949 to November 1950).
2.) The Korean War outbreak led to massive increases in raw material prices. As the ERP notes, 75% of industrial goods had increased in price by mid-October, 44% had risen 10% or more, and 26% were up 20% or more above the pre-Korean war levels.
As an aside, here are the charts from the Economic Report to the President for both Whole
sale and Consumer prices.
