The phillips curve, which shows how inflation changes when unemployment changes, has been met with skepticism in the rate of inflation in many countries has remained remarkably low despite the large fluctuations in the unemployment rate.
Despite the fact that the phillips curve has flattened out in the U.S. so is the continued compatibility with the Federal Reserve’s ongoing monetary policy normalization, according to Andreas Johnson and Mattias Bruér SEB.
The notes in the a by client letters to the world’s most important central bank, the Federal Reserve, operates in the Phillipskurvans the paradigm and expect that low unemployment will lead to rising inflation.
Economists notes that there is no consensus on why inflation has become less sensitive to unemployment, and mentions three global explanations (globalization, the success of monetary policy and lower inflation rates) and one that is specific to the united states (the downward trend of health costs).
In the Federal Reserve’s measure of inflation is core PCE included administered prices for health care services (Medicare, Medicaid) as determined by the state. The proportion of health care has risen and now accounts for almost 20 percent of core PCE. Nedåttrenden for hälsovårdsinflationen has made it more difficult for the Fed to reach its inflation target of 2 percent, notes the SEB economists.
One way to look at the effects of the changes in the phillips curve is to compare a model which used the 1980s parameterestimat with one that uses the latest parameterestimaten with regard to the actual inflationsdynamik.
”Not so surprising predicts the old Phillipsmodellen more deflation and a slower rise in inflation in the wake of the great recession,” write the two economists.
In contrast to this, the phillips curve, where the 2017 year parameterestimat used ”on a relatively correctly captured the actual inflationsdynamiken since 2009”.
”In other words, despite the smaller sensitivity of inflation in relation to unemployment, so it is correct to say that the U.S. phillips curve is consistent with the ongoing monetary policy normalization”, according to economists’.
What economists thought was the most surprising and also most interesting was that during the past two quarters suggest the two models of the phillips curve on the identical inflationsdynamik.
”If this turns out to be a recurring pattern and not a coincidence, so must the Fed may eventually speed up his current slow process of normalisation of interest rates”, they write.
The economists note that before the crisis, during the years when the Fed fundsräntan gradually raised from 1 percent to 5.25 percent, so the converged models, and we can move there again.
They noted that the minutes from the Fed’s June meeting showed that several members were concerned that an unemployment rate below the target could lead to a sharp rise in inflation.
”This could be an argument for the Fed to go further and raise interest rates in september although weakness in inflation continues,” writes Andreas Johnson and Mattias Bruér.
Questions and comments always welcome in the newsroom[at]tradingportalen.com