Searching for the Phillips curve: the puzzle of missing inflation
•Despite the recent acceleration in economic activity, inflation has been absent. This has led to questions about the robustness of the traditional Phillips curve framework, which is based on the relationship between inflation and resource utilisation. •In general, the framework makes economic sense. However, its shortcomings could be due to poor estimates of its inputs. For instance, there might be more slack in the economy than generally believed.
•In addition, external factors might be responsible for masking the Phillips curve. Productivity growth has been slow since the global financial crisis, in turn curbing wage inflation.
•Also, globalisation and technological progress might have affected the structure of the labour market, likely resulting in downward pressures on wages. Labour has become more fragmented and commoditised in the last 10-15 years, weakening workers’ bargaining power.
•In 2018, typical Phillips curve models for the US and the eurozone suggest that inflation will rise slightly. The US will probably take greater strides towards its official target in the next couple of years, while slack in the eurozone implies slower progress.