A Look at the Phillips Curve

I'm not much of a believer in the Phillips Curve, the trade-off between employment and inflation, but with all the stagflation talk, it's worth taking a look.

This data is from 2000 to the present. The X-axis is the unemployment rate and the Y-axis is the trailing 12-month core CPI. The arrow points to the data from January and December.

All the data I used is from the government, so consider it at your own risk. Actually, I'm rather surprised by how well the curve holds up, meaning the dots seem to run diagonally from lower right to upper left. (Well, sort of...the R-squared is 0.3734.) If we're in stagflation, then this relationship should breakdown and the dots would start drifting to the upper right. So far, that isn't happening.

At least, not yet.

Comments

[User 155076:]

I'd rather say: between 4 and 5.5% of unemployment there is no relationship between considered values - graph goes in paralel to X. After 5.5% there is no connection as well: Ys jump all over the range. Conclusion: data are not reliable.

2008 Feb 24 01:19 PM

[It Figures:]

I'm with User 155076. Perhaps it should be re-named the "Phillips Inverted L", parrellel to X at lower X values, to Y at higher.

2008 Feb 24 03:14 PM

[Eric Balkan:]

Core CPI has been accused of being politicized, and not worth much. Try the chart against your own basket of goods. Some analysts are saying that if we measured CPI the way it was measured during the Carter administration, it would be in double digits. Given the prices rises in grains, metals, foreign currencies, fuel... that wouldn't surprise me.

2008 Feb 24 05:07 PM

[Living Off ...:]

Eric, i think the figure quoted was 12%.

2008 Feb 25 12:35 AM

[Ebi:]

For sure, CPI is up. If unemployment is still low, it is only a matter of time before it is going to go up. The Fed can't continue lowering the rate when CPI is surging madly. To cure the problem (stagflation), you need both fiscal and monetary policies. Hence, the newly elected government needs to spend more and or cut taxes.

2008 Feb 25 05:37 AM

[jjason:]

I am not sure if the Phillips curve is going up or down (or right or left for that matter. Then, will it revert to the mean (or nice)? Beats me!

After listening to a US Senator on the finance committee asking the Secretary of the Treasury "What is the current status of the Financial Literacy Commission" I listed CAREFULLY to Henry Paulson's answer which was "We hold frequent meetings".

Half the posts (and 75% of the [Comment edited for abusive language. Commenter put on watch.] on CNN) are written/spoken by financial illiterates. Buffet taught me that "if you don't understand it then don't buy it". My mother taught me the difference between right and wrong. I learned how to be frugal in the Boy Scouts of America... and I didn't ever want to buy the Brooklyn Bridge or overpriced tulips.

Stupid people who listen to stupid people will remain stupid and poor too. Americans need to wake up to the reality that we are in trouble as a people right now. Some of us saw the problems unfolding...others did not. I am worried about the future. But I am better off than all the homeless people I saw living on the beaches of Oahu, Hawaii last November. All those people could not afford to rent a home or buy one either! I felt sorry for them. They were priced out of the market by wealthy people. If something is overpriced, don't buy it. Most Americans will learn this the hard way. Too bad.

2008 Feb 25 06:39 AM