By Nick Timiraos of The WSJ.
I wish he had been a bit more careful in phrasing certain passages. For example, he says inflation rose 2% in the last year. Prices rose 2%. If inflation rose 2% it would mean that this year's inflation rate is 2% higher than last year. So if, for example, the inflation rate was 2% one year then the next hear it would be 2.04%.
The relationship between unemployment rates and how much prices change might depend on the short run aggregate supply (SRAS) line. It might get steeper the higher GDP gets. Some of my links below to earlier posts will show this. We want aggregate demand (AD) to be at the point where SRAS just starts getting steep (where prices will rise significantly). That would give us a certain GDP and unemployment usually falls when GDP rises. When they talk about the neutral interest rate, that might be the rate that gives us this optimal amount of AD.
When it talks about marginal workers re-joining the labor force (people who had previously given up looking for work), that could cause SRAS to increase or shift to the right, lowering prices (or keeping them from rising too much if AD is also shifting to the right).
When it mentions that "expectations of future inflation can be self-fulfilling" it means that workers demand higher wages since they expect prices to go up. But that causes SRAS to shift to the left (since that is what happens to supply when the price of resources go up). But that itself will raise prices of all the goods that are sold. This will not be a problem if expectations of future inflation rates are pretty low, as they have been in recent years.
When it mentions that the natural rate of unemployment is between 4.1% and 4.7%, that is the rate we would get if we had the neutral interest rate.
Excerpts:
"The studies suggest prices might climb faster, but not too much, if unemployment falls a bit more. And inflation might become worrisome if joblessness falls a lot more."Related posts:
"In one scenario, inflation accelerates once unemployment falls to very low levels, requiring more-aggressive rate increases to keep price pressures in check.
In the other, a period of sustained low unemployment draws more workers into the labor force while inflation pressures stay under control."
"Fed officials want to raise rates enough to prevent the rapidly expanding economy from overheating, but not so much that they choke off healthy growth prematurely."
"Excluding volatile food and energy categories, inflation rose 2% in May from one year earlier."
"Fed researchers recently examined the possibilities of the two inflation scenarios.
One study analyzed data for U.S. metropolitan areas to see what happens to inflation when unemployment is very low.
Economists have long held that inflation rises as unemployment falls, and vice versa. But the relationship, called the Phillips curve, has appeared very weak in recent decades. Inflation has remained tame even as the jobless rate fell to 4% in June from 10% in 2009. The Fed economists found, however, that inflation picked up more quickly once the jobless rate fell below 3.75%."
"In the late 1960s, the last time unemployment fell below 4% for a sustained period, inflation steadily accelerated. By the 1970s, if inflation rose one year, consumers expected it to rise at least as much the following year—and it did. Fed officials believe expectations of future inflation can be self-fulfilling as workers demand pay increases and businesses raise prices in anticipation.
Separate Fed research published in 2016 used data from the 1960s to measure the level at which inflation pressures begin to harm the economy. The researchers concluded this happens when core consumer prices rise by 3% on a sustained basis, according to the Fed’s preferred gauge.
Economists say that inflation accelerates when unemployment falls below a so-called natural level, which Fed officials estimate at 4.1% to 4.7%.
The “point at which you can get a large inflation overshoot” approaching 3% is when the jobless rate falls 1.5 percentage points below the natural level"
"Fed officials are also eager to know how much workers might benefit when unemployment is very low. The policy makers wonder whether people at the margins of the labor market might more easily find jobs, gain skills and become more productive—permanently improving their chances of employment. This would lower the natural unemployment rate and reduce the prospect of the economy overheating."
"“It’s difficult to forecast the economy and these concepts that we have,” Mr. Powell said in a radio interview in July. “It’s not like the fact that water boils at 212 degrees. The economy doesn’t boil at 4% unemployment.”"
Powell Says Fed Should Keep Gradually Raising Interest Rates.
Unemployment Has Bottomed Out. So Where's the Wage Growth?
E-Commerce Might Help Solve the Mystery of Low Inflation
U.S. Inflation Rate Hit 6-Year High in May
Fed officials disagree on how much inflation the current low unemployment rate might cause
Is There A Neutral Interest Rate? If So, How Much Is it?
Is The Phillips Curve Dead In Japan? Maybe not
Is The Phillips Curve Not Holding Up Well Because The Service And Goods Sectors Are Behaving Differently?
Has the Fed Flattened the Phillips Curve?
Nobody knows what the natural rate of unemployment is today
More on the natural rate of unemployment
How Central Banks Differ In Their Methods Of Calculating Inflation.
Fed Officials Disagree On Threat Of Inflation (from 2009)
Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014)
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