Fed Shatters Conventional Economic Wisdom
Conventional economic wisdom holds that the record-low unemployment rate will cause employers to bid up wages, which then will be passed through to consumers in the form of higher prices, triggering rising inflation.
However, conventional wisdom is being shattered.
Just as civilization came to understand that the world is not flat, the world just recently realized that the framework for understanding the relationship between inflation and employment, The Phillips Curve, was wrong.
While civilization generally progresses at glacial speed, this is a breakthrough in the world’s understanding of economics and it has modern-world consequences.
William Phillips, a professor of economics at the London School of Economics in the 1950s, explained the inverse relationship between unemployment and wages in 1958.
When the economy grows the unemployment rate declines, driving wages and spurring higher inflation.
By the late 1960s, The Phillips Curve was the primary framework for forecasting inflation by central banks across the world.
Now, however, in a departure from conventional economic wisdom, The Phillips Curve is being rethought by the U.S. Federal Reserve.
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