Sunday, December 3, 2017
What is happening to the Phillips Curve?
The president of the Federal Reserve Bank of Chicago, Charles Evans, recently said that the Federal Reserve is struggling to understand a trend in a key economic model. "We don't have a great understanding of why the it's gotten so flat", Evans said of the the so-called Phillips Curve. The Phillips Curve shows the relationship between unemployment and inflation and as unemployment decreases, inflation should increase with more people in the workforce. The unemployment rate is about 4% and inflation has continued to fall since the beginning of the year. The Fed is attempting to stabilize prices at an inflation rate of about 2% but this steepening of the Phillips curve would suggest that wage rates are rising.
https://www.cnbc.com/2017/11/15/the-federal-reserve-doesnt-understand-whats-happening-to-a-key-economic-model-feds-charles-evans-says.html
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This is interesting because we could be going into a new territory of economics that we do not yet understand. Whatever the outcome may be, im sure this will be a great learning experience for the Fed and fellow economists.
ReplyDeleteThis article is very interesting and it is interesting to see economics start to worry about inflation. We have learned about the Philips curve and it is nice to the real world application of it.
ReplyDeleteI suspect there are other factors out there that are causing the below-target inflation rate. While our unemployment has been decreasing and is right around the Fed's target level, we would expect inflation to rise. However, we also expected a rise in inflation from the very low interest rates, but that has yet to happen.
I think the Fed has to identify all of the factors causing inflation to remain so low, and start to come up with other solutions for getting inflation to the target level of 2%. I do agree with Derrick that this could be a new territory economics, and if it is, I am sure a lot of interesting and significant theories will come out. We can wait and see.