J. Bradford DeLong
Since 1960 inflation in the U.S. has fluctuated between a low of 1.5 percent and a high of nearly 10 percent. Whenever unemployment has been pushed below the natural rate of unemployment, inflation has almost invariably accelerated. However, inflation has also accelerated at other times: in response to supply shocks like the tripling of world oil prices in 1973.
Low unemployment has been associated with accelerating inflation because by and large inflation expectations have been adaptive: this year's expectation of inflation is usually very close to what last year's inflation was. Thus policies to reduce inflation this year carry the added bonus of reducing expected inflation next year, and thus making it easier to achieve low inflation and low unemployment.
|Inflation 1960-Present Unemployment 1960-Present Phillips Curve Growth and Fluctuations, 1980-1998 Long-Run Growth|
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