The Phillips curve is alive and well (unless it's dead)

See Post from Harvard professor Greg Mankiw. He shows that over the last 30 years, when percentage of 25-54 year olds employed increased (similar to the unemployment rate going down), inflation was higher than when the percentage of 25-54 year olds employed decreased.

If the Phillips Curve is right (at least in the short-run), this is what we would expect: inflation to be higher when unemployment is lower.

According to today's WSJ, Fed. Vice Chair said the economy is not beyond full-employment even with unemployment at 3.6%, so high inflation in the near future is not a concern. Inflation does not seem to respond to low unemployment the way it used to.

See also The Economy Is Strong and Inflation Is Low. That’s What Worries the Fed. by Jeanna Smialek of The NY Times. Excerpts: 

"Inflation rose a scant 1.6 percent in the year ending in March, well short of the central bank’s 2 percent target. The Fed’s policymakers are worried about the continuing sluggishness, and President Trump has repeatedly cited low inflation as a reason for the central bank to start cutting interest rates.

“We are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” Mr. Trump said in a recent tweet.

The Fed, for its part, is wrestling with how to respond to persistently low inflation amid what appears to be the weakening of a foundational economic relationship. Unemployment is at its lowest level since 1969, which should spur higher wages as companies compete for workers. Climbing labor costs should eventually get passed along to customers, driving inflation up. Instead, it is moderating."

"The breakdown leaves the Fed staring down an uncomfortable question. If officials can’t get that old chain reaction to work 10 years into an economic expansion, against a backdrop of tax cuts and high government spending, and with exceptionally low joblessness, will they ever?

The Fed’s chairman, Jerome H. Powell, has called weak inflation “one of the major challenges of our time.” In part to address it, he has led the Fed to embark on a yearlong review of its communications, tools and strategy. A major goal is determining what is reining in price gains and what can drive inflation back to the Fed’s target in a sustainable way.

Extra labor supply is one obvious culprit. Since 2016 at least some Fed officials have declared the labor market “at or near full employment.” But the job market keeps surprising them. Prime-age workers are hanging onto their positions for longer.

That’s provided an unexpected source of new employees, enabling brisk hiring to persist without a run-up in wages and prices. Average hourly earnings have shown progress without rocketing up.

Officials have repeatedly lowered their estimates of sustainable unemployment as a result, and Richard Clarida, the Fed’s vice chairman, has suggested that the jobless rate is “not far below many estimates” at that revised level.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, goes a step further. He thinks that the Fed, which has raised interest rates nine times since 2015, began doing so too early and that the economy remains below full employment. Premature tightening has convinced the public that inflation won’t rise to 2 percent this business cycle, he thinks, and now consumers and businesses are acting accordingly.

Beyond slack in the labor force and expectations, forces like technology and globalization may be restraining pricing power. Consumers with Amazon and Yelp in their pockets can easily avoid overpaying."

Related posts:

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)

E-Commerce Might Help Solve the Mystery of Low Inflation

 
Fed officials disagree on how much inflation the current low unemployment rate might cause 

Fed Looks for Goldilocks Path as Jobless Rate Drops