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Graph of the Week: Forecasting Inflation
J. Bradford DeLong
- The blue line shows actual inflation during the 1990s.
- The red line shows what inflation would have been had unemployment followed its actual course during the 1990s and had the relationship between unemployment and inflation been the same as in the 1970s and 1980s.
- The wide divergence between these two lines shows the extent to which we are--as far as inflation is concerned--living in a "new economy."
- Had the relationship between inflation and unemployment continued to follow its pre-1990 pattern, inflation would now be between 5 and 6 percent per year--not less than 2 percent.
- What is the cause of this extraordinarily favorable inflation-unemployment tradeoff? The principal suspect is the computer-driven acceleration of productivity growth that has allowed employers to satisfy the high real wage aspirations that accompany low unemployment without raising prices.
- But this is only a guess. It will be at least half a decade more before economists can speak with confidence.
Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
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