Inflation is driven by… Well, we aren’t sure

Are we in a new inflation regime?

More inflation here. But this is an interesting topic that seems to have no answer at the moment. My take is such that we should not expect – and mathematically it is unrealistic – to average 2% inflation forever. In fact, until the industrial revolution, inflation was under 1% every year and very consistent. So, my point is, could inflation simply be reverting back to its natural long term mean? If this is the case then we can try all we want to push inflation higher, but it will not happen. Remember, in a radically uncertain world, we do not know what the future holds.

This short article postulates the drivers of inflation. Typically it has been evidenced that as the unemployment rate decreases then we should see inflation tick up. But this has not (really) happened in this expansion… At least not yet. This has led many to speculate the Phillips Curve is broken or does not apply to this expansion; which would invalidate the theory.

So the question is, what is driving inflation if employment is not? Well, as the article shows, there has always been other factors that better explain inflation than employment. But pinpointing these factors is incredibly difficult as most variables are multicollinear. My take is that “transitory” factors are responsible for recent weak inflation numbers. And of course wage inflation is still poor. Wage inflation is needed before we can expect to see inflation pick up.

Categories: Inflation

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