Historical Relationship Between Inflation and Unemployment
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What is the historical relationship between unemployment and inflation?
Using data for the year 2010, what are the most current figures for the unemployment rate and the inflation rate?
What does this say about the economy today?
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Solution Summary
There is historical evidence of the relationship between the unemployment rate and inflation. While there is a distinct relationship between these measures, it is complicated by more difficult measurements, including the public's outlook on future inflation. The Phillips Curve can be used in conjunction with Bureau of Labor Statistics figures to assess the current state of the economy in terms of inflation and unemployment.
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In the short term, there is a rough inverse correlation between unemployment and inflation. When unemployment is high, inflation is low. Conversely, when unemployment is low, inflation is high. Regulators often want to limit both and this relationship makes doing so rather difficult.
The Phillips curve is often used to describe this relationship:
(though the curve should be smoother than I have drawn). You can see from the Phillips curve that when inflation is highest, unemployment is lowest. Hence, ...
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