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Expectations and the Final Mile of Disinflation

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Abstract

In the aftermath of the COVID-19 pandemic, the U.S. economy experienced a swift recovery accompanied by a sharp rise in inflation. Inflation has been gradually declining since 2022 without a notable slowdown in the labor market. Nonetheless, inflation remains above the Federal Reserve’s 2 percent target and the path of the so-called final mile remains uncertain, as emphasized by Chair Powell during his press conference in January. In this post, we examine the unemployment-inflation trade-off over the past few years through the lens of a New Keynesian Phillips curve, based on our recent paper. We also provide model-based forecasts for 2024 and 2025 under various labor market scenarios.

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  • Richard K. Crump & Stefano Eusepi & Aysegul Sahin, 2024. "Expectations and the Final Mile of Disinflation," Liberty Street Economics 20240305, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:97903
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    Keywords

    Phillips curve; inflation; unemployment; natural rate of unemployment; expectations;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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