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MNI: Stickier Prices Amplify Fed's 'Last Mile' Problem -Paper

(MNI) WASHINGTON

New Fed and academic research re-examines the tradeoffs between unemployment and inflation.

New research on the tradeoffs between unemployment and inflation by academic and Federal Reserve economists finds the "last mile" of bringing inflation down to 2% much costlier than the road traveled thus far, co-author Virgiliu Midrigan told MNI.

Analyses of CPI microdata during Covid-19 and in the Great Inflation of the '70s and '80s show firms adjust their prices more often when price levels are rising quickly in the economy. That in turn exerts more upward pressure on inflation, meaning that the shape of the Phillips curve charting the relationship between unemployment and the rate of increase in prices can become steeper than assumed in standard macroeconomic models, said Midrigan, economist at New York University.

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New research on the tradeoffs between unemployment and inflation by academic and Federal Reserve economists finds the "last mile" of bringing inflation down to 2% much costlier than the road traveled thus far, co-author Virgiliu Midrigan told MNI.

Analyses of CPI microdata during Covid-19 and in the Great Inflation of the '70s and '80s show firms adjust their prices more often when price levels are rising quickly in the economy. That in turn exerts more upward pressure on inflation, meaning that the shape of the Phillips curve charting the relationship between unemployment and the rate of increase in prices can become steeper than assumed in standard macroeconomic models, said Midrigan, economist at New York University.

Keep reading...Show less