Journal Article

Is unemployment helpful in understanding inflation?

Abstract: The simultaneous decline of core inflation with the increase in the unemployment rate during the recession of 2007-09 has renewed debate about the use of economic slack, such as unemployment, for predicting inflation. Doh examines the relationship between cyclical fluctuations in inflation and unemployment and finds that the relationship varies over time and tends to be stronger and more significant during recessions and early in recoveries than during mature expansions. The empirical results also suggest the trend component of unemployment increases more in a weak recovery than a rapid recovery, resulting in less downward pressure on inflation. Hence, carefully assessing the size of the cyclical component of unemployment is important for understanding inflation dynamics.

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Economic Review

Publication Date: 2011

Volume: 96

Issue: Q IV

Pages: 5-26