Reclaiming Common Sense

The Phillips Curve - Does it Really Matter?

People who have taken a macroeconomics class has heard of the Phillips Curve. The Phillips Curve plots the rate of inflation versus the rate of unemployment. The theory is that you cannot have high inflation and high unemployment at the same time. It also projects that you cannot have low inflation and low unemployment. This "curve" was broken during the Greenspan Years when we had low inflation and low unemployment. This column has written numerous articles on how the unemployment rate that is the headline number, U-3 unemployment, does not factor in the changes in participation. The December non-seasonally adjusted U-3 unemployment rate was  3.9%. The rate of inflation was 2.2%. Is our inflation rate low because our effective unemployment rate is much higher than 3.9%. It is  closer to 9% than 4%. What do you need to know for this week's CPI (Consumer Price Index) Report?

We have been experiencing inflation since the end of 2015. This doesn't sound like a big thing. We had two periods of deflation since January of 1980:  December 2009 through October 2009 and January through October of 2015. This is the CPI-U level, the urban wage earners. Where some people were touting the "savings at the pump," while gas prices were falling and dragging down the retail numbers, this column was calling out the streak of consecutive months with deflation.

We have had inflation over 3% during January. We had inflation over 3% during February 2000 to February 2001. We had inflation over 3% during 2010 (after January 2009 deflation) and January 2012. We had inflation over 4% during January 2006 and January 2008. The closest that we have been to 3.0% lately was 2.82% during February of 2018.

We have been at the bottom of the unemployment rate level during 2017. We have seen lower unemployment levels during October-December 1999,  April 2000, May 2000, and October to Dec 2000. We had official unemployment at nearly 10% during the first period of deflation. We had deflation during a period of time while the official unemployment rate was between 4.8% and 6.1%

The Sweet Spot appears to be between 4% and 6% Unemployment and 2-4% Inflation. The participation rate this past month was skewed low by a boost in the workforce population number. A low participation rate masks "real unemployment." If people are not participating then they are neither employed nor unemployed. They are missing participants. Higher inflation may indicate that the real rate of unemployment is decreasing from a range of roughly 8.5% (8.45% to 8.67%.)Unemployment between 8-10% should indicate inflation between 0% to 4%. Could we hit 3% inflation and 5% unemployment? Unemployment was up during January. We know that there was some wage inflation. Will it carryover to the inflation picture this month?

Watch for Commodity Deflation and Service Inflation, again. The data has been "interesting" lately with Commodity deflation and Service Inflation. Shelter costs have been soaring. Health insurance inflation has been "non-existent." Where will we see inflation when we see inflation? Will health insurance data rise before commodities? We will find out later this week.

It's the economy.