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Speaking of the Phillips curve, I was reminded of something I recently read:

Leash the Dogma

Without torturing every permutation of this relationship, suffice it to say that the foregoing clouds of noise and weak relationships show up in every other statement of the inflation-unemployment tradeoff, regardless of whether one uses levels, changes, trailing data, subsequent data, CPI inflation, core inflation, or mixtures of all of these.

What's perplexing about this entire inflation-unemployment argument is that the original "Phillips Curve" proposed by A.W. Phillips in 1958 was a relationship between unemployment and wage inflation, based on century of data where Britain was on the gold standard and general price inflation was virtually non-existent. So the Phillips curve is actually a relationship between unemployment and real wage inflation.

The resulting relationship can be stated very simply: wages rise, relative to other prices, when unemployment is low and labor is scarce; wages fall, relative to other prices, when unemployment is high and labor is abundant. The chart below nicely illustrates this relationship in U.S. data. It relates current unemployment to subsequent real wage inflation.

If this is true, utilising it to say something about general inflation is to push it, but it can work as long as general inflation is mostly dictated by wages and not say the price of oil or imported deflation from a nearby currency area, or any other factor.

by fjallstrom on Mon Oct 28th, 2019 at 11:02:02 AM EST
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