Source: EconLog
by Asad E Butt
“When inflation was rising rapidly in 2022, it was predicted that a sustained period of high unemployment would be required to bring inflation back to the Federal Reserve’s 2% target. Such predictions are closely aligned with the findings of the classic Phillips curve, which hypothesizes a trade-off between inflation and unemployment. These predictions were strongly rooted in the sacrifice ratio — the rise in unemployment typically required to reduce inflation by one percentage point. Historical experience suggested that the sacrifice ratio would be substantial, but inflation declined significantly without a notable rise in unemployment. It remained low, fluctuating between 3.6% and 3.9% through 2021 and 2022. The sacrifice ratio turned out to be close to zero. The big question that these events raise is whether the economists overestimated the persistence of supply-side shocks and the sensitivity of inflation to unemployment.” (03/16/26)