When unemployment is low, inflation is high and vice versa. This combination of high inflation and low unemployment seemed to confirm the validity of the Phillips curve, which posits an inverse correlation between inflation and unemployment. At the same time unemployment was at lows of about 3.4%, a rate not seen since the late 1960s. That peak was 9.1% inflation, a rate not seen since the early 1980s. Inflation was gaining momentum from mid-2021 until it peaked at 40-year highs in June 2022. The inflation narrative is straightforward. In truth, it goes to the heart of economics generally and helps to explain why so many forecasts are so badly wrong. The question goes to the heart of modern economics (the so-called Neo-Keynesian consensus) and the models used in economic forecasting. This is more than a matter of competing narratives. That’s probably the most important question in economics today.
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