Heads must be exploding at the Federal Reserve — unemployment keeps sinking below the level that economists and policy makers think should instigate significantly much higher inflation — because econometric models that estimate that threshold are estimated, as they must be, with historical statistics. Those cannot accommodate the consequences of the technological and institutional changes that are redefining U.S. labor, commodity and product markets.
Perhaps the most striking example is the disappearance of the Phillips curve—the hypothesized inverse relationship between inflation and unemployment. In plain English, at 3.8% unemployment we should be seeing a lot more wage and price jumps than we are experiencing.
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