One of the many monetary mysteries of the moment is why the inflation rate has been so persistently below the Federal Reserve’s 2 percent target. Is the historical relationship between unemployment and inflation—the Phillips curve that suggests inflation rises as unemployment falls—broken?
Here’s how former Fed Chairman Ben Bernanke, now a distinguished fellow at Brookings, answered that question when Alan Murray, editor of Fortune, put it to him recently at the Hutchins Center on Fiscal and Monetary Policy. He said a lot turns on whether the public and financial markets continue to expect the Fed can get inflation up to target or not.
Inflation’s harder to forecast than the Fed’s statements on inflation. It’s a safe bet the FOMC will stick to the party line at its next meeting and continue foreseeing a rise to 2 percent as the Phillips curve kicks in and the “transitory effects” of declines in oil and import prices work their way through the system.
Commentary
The circular logic of inflation expectations
February 18, 2016