Inflation: Back to the Future

Another month, another impressively low unemployment number, but another flaccid inflation print.  No wonder the US Federal Reserve is baffled.

Modern macroeconomic theory depends upon the famous Phillips curve, and its pressure cooker model of the inflationary process. Let the economy run too hot, and inflation is sure to follow. Let the pressure drop too low, and wage and price growth will ease.

Yet in the US, unemployment is at multi-year lows but inflation is nowhere in sight. In the UK it is hardly better. In Japan it is even worse.

Across the developed economies, the Phillips curve has gone ignominiously flat. The world’s leading central bankers are scratching their heads.

I explain why older and less fashionable theories of inflation may be a more useful guide to the future in today’s circumstances in an op-ed in the Financial Times published on July 28, 2017.

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