OPINION: Nobody wants to see people lose their jobs, but policymakers all seem to acknowledge that curbing inflation will entail some level of trade-off.
The tight labour market probably didn’t get the US into this inflationary mess, but it is part of the reason that it’s going to be so hard to get out of it., bringing the unemployment rate to just 3.5 per cent, matching the lowest level since 1969.Where the household and establishment surveys had sent mixed signals in previous months, the latest data showed unambiguously that the labour market remained red hot in July. Average hourly earnings rose 0.
Fed chairman Jerome Powell is likely to see the latest report as a green light to stay aggressive with his interest-rate increases, including a 75-basis-point one at the next meeting in September. Before the current bout of inflation, many in the economics community were ready to abandon their historic emphasis on the relationship between unemployment and inflation, known as the Phillips curve.In the decades leading up to the pandemic, the “curve” had become more of a “cloud”, and many economists thought that the relationship had ceased to be very helpful either as a predictive or prescriptive tool.
Among several others, economists Olivier Blanchard, Alex Domash and Lawrence Summers now suggest that the unemployment rate may have to rise to around 4.9 per cent to get inflation under control. They say that the job market is overheating at current levels, as exemplified not only by low unemployment but also by an unprecedented level of job vacancies.
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