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Time to Curb Inflation Following the Phillips Curve?
According to the Bureau of Labor Statistics, the all items Consumer Price Index rose 7.5% for the 12 months ending January 2022 – the largest 12-month increase since the period ending February 1982. The food and energy indexes alone accounted for an increase of 7% and 27% increase over the previous year respectively, leaving the “all items less food and energy” index to rise to 6% over the last 12 months. According to the Federal Reserve Economic Data (FRED) website, April 2020 recorded the highest unemployment rate during the COVID-19 pandemic at 14.8%. As of February 2022, the unemployment rate has reduced to 3.8%, but is slightly higher than the pre-pandemic level of 3.5% as reported for January and February of 2020.
On March 2nd 2022, Chairman Jerome Powell from the Federal Reserve, testified in Congress that the FED is considering raising the federal funds rate (or the borrowing cost of reserves between banks) sometime in mid-March 2022 to restrain rising inflation while observing the crisis between Ukraine and Russia.
Discussion Questions:
- With waning pandemic, supply chain in gridlock and deepening crisis between the Ukraine-Russia war, will prices keep rising leading to overheating the economy? Do explain.
- With high inflation and low unemployment rates, is the U.S. economy on track to follow the macroeconomic principle behind the “Phillips Curve”? Do explain with a Phillip Curve graph.
- Based on the comments of Bankrate senior economic analyst, Mark Hamrick, below, which do you think is currently happening – (a) inflation is stronger than wage growth OR (b) wage growth is stronger than inflation?
“A stronger job market is key for individuals to achieve their financial goals. At the same time, if inflation is outpacing wage growth, people will find they’re having a tough time managing. Conversely, if wage growth were to outpace inflation, that’s a positive dynamic for individuals and households.” Mark Hamrick, Bankrate senior economic analyst.
- Self-reflection: How will this information change your consumption expenditure plans as a consumer in the coming months? Do explain.
Sources| BLS: News Release – Consumer Price Index – January 2022, FRED Economic Data: Unemployment rate; Federal Funds Effective Rate, CBS News: Federal Reserve poised to raise interest rates to curb inflation, Powell says, CNN: Russia-Ukraine crisis replaces Covid as top risk to global supply chains, Moody’s says, You will love economics: Macro Unit 3.6 The Phillips Curve, Bankrate: The Phillips curve, explained – what it says about soaring inflation in the COVID economy ,Pixabay: Photo
