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US can curb inflation without increasing unemployment, says Fed

US can curb inflation without increasing unemployment, says Fed

If correct, that would improve the chances of a soft landing for the US, as the Fed raises interest rates to cool price pressures.

The research examines the Phillips curve, a measure of the inverse relationship between inflation and unemployment, for 29 countries over the seven years prior to COVID-19 and the six quarters of pandemic recovery for which data are available, beginning in January 2019. 2021.

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The authors found that in all countries, including the US, the curve steepened, meaning that a slowdown in inflation is causing unemployment to rise less than before the public health crisis.

While the authors caution that their analysis is limited, given that there is only a year and a half of recovery data to examine, their conclusions bolster hopes that the Fed’s rate hikes can curb high inflation without causing millions of Americans lose their jobs.

And if the researchers’ findings hold true over time, they could signal a broader turnaround in the economy after years of tightly controlled inflation that operates largely regardless of the proportion of Americans out of work.

“What drives our results is that declines in unemployment rates are associated with larger increases in inflation rates during the recovery from the pandemic than during the run-up to it,” Authors Bart Hobijn, Russell Miles, James Royal, and Jing Zhang wrote in the article.

Before the pandemic, the Phillips curve had been flattening for more than a decade. The last time the US saw a strong relationship between unemployment and inflation was in the 1960s, when falls in the former tended to be associated with increases in the latter.

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But the trend line became more blurred in the 1970s, and in the years leading up to the pandemic, inflation held steady even as the unemployment rate plunged to 50-year lows—in other words, a flat curve. flat.

Many economists, the authors of the Chicago Fed article wrote, considered the Phillips curve to be “dead”.

But, at least for now, the curve seems to have revived. That means the US and other countries now have a “sacrifice ratio” smallest, which refers to the amount of additional unemployment that economies would have to tolerate to slow inflation to one percentage point.

“The steeper Phillips curves suggest that the sacrifice ratio has decreased substantially since the start of the recovery”the authors wrote in the report.

Source: Gestion

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