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What inflation worries?

There's a simple reason why this might raise inflation. It's that there has for years been a strong trade-off between unemployment and inflation in the following 12 months, just as the old-fashioned Phillips curve predicts. Since 1997 the correlation between the official unemployment rate and consumer price inflation excluding food and energy in the following 12 months has been a whopping minus 0.79. This is why, when the Fed issued its forward guidance on interest rates in 2012-13, it pledged not to raise rates at least until after unemployment had dropped below 6.5 per cent - because lower unemployment is usually inflationary.

This post-1997 relationship implies that if the Fed’s forecasts are correct and that unemployment falls to between 5.1 and 5.5 per cent in 2016, inflation in 2017 will be around 2.6 per cent; it is now 2.1 per cent.

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