How Much Does Unemployment Need To Rise to Tame Inflation?

What will it take to bring inflation down to the percent rate the Federal Reserve says it continues to target?

The current surveys of public opinion imply that it will not take much. The Federal Reserve Bank of New York’s survey found that only 40 percent or so of the public thinks that unemployment will be higher a year from now while the media expectation for inflation came down to 6.2 percent over the next year and 3.2 percent over the next three years. A survey by Rasmussen found that only 35 percent of the public expected unemployment to rise over the next year.

Let’s be perfectly clear about this. Unless the Federal Reserve fails utterly in its attempt to bring down the rate of inflation over the next year, the unemployment rate will absolutely be higher than the 3.5 percent rate registered in July. Even if the Fed were not tightening monetary conditions, it would be a very good bet that the unemployment rate would rise for the simple fact that it is at a historically normal low rate. When unemployment is this low, it tends to go higher either because more people are drawn into the labor market—which means the number of people who want jobs but do not yet have one rises—or employers start to pull back from hiring because labor becomes more expensive.

The Fed is right now engaged in an explicit attempt to cool off the labor market. It would like to begin by shrinking the number of vacancies in the job market. This would mean that the number of job openings in the monthly JOLTS report would decline. Numerous studies have found, however, that a decline in job openings is almost always accompanied by a rise in unemployment. When businesses are looking for fewer employees, there tends to be more of a gap between willing workers and open positions. So if Fed policy is effective, it likely means unemployment will rise.

So how far does unemployment need to rise? That depends on what economists call the “natural rate” of unemployment. This is basically an unmeasurable number that tells us what the unemployment rate can be before it starts to exercise inflationary pressure on the price level. If the natural rate of unemployment remains as low as it was prepandemic, we may need only a small increase to bring down inflation. There’s reason to suspect that the natural rate may have risen, in part because of people deciding that they will retire early unless compensation is very good. If the natural rate is higher, we may need the unemployment rate to rise to five percent or more before inflation breaks. Very few Americans seem prepared for that.

Alex Marlow & John Carney
Breitbart News Network

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