Inflation and Unemployment in US – The flattening of the Phillips curve

I’m thinking about the rest of us, starting at the top—with the Fed—who are struggling to figure out the nature of the tradeoff as the Fed begins to contemplate unwinding.  Given Chair Yellen’s (very appropriate) focus on job-market slack and thus her up-weighting of the full employment side of the mandate, there’s clearly some anxiety building around the potential for overshooting on inflation.

A big part of the problem is the evolution of the inverse relationship between unemployment and price growth, i.e., the flattening of the Phillips curve, implying a reduced negative correlation between inflation and unemployment.  This phenomenon is by now fairly well known; the figure below (see here for more explanation) shows how much the correlation has diminished over time.

Chosen excerpts by Job Market Monitor. Read the whole story at The Tradeoff between Inflation and Unemployment: What We Don’t Know Can Hurt Us | Jared Bernstein | On the Economy.