The One Chart That Tells Us If We’re Seeing Runaway Inflation

The dreaded Phillips curve describes the runaway inflation of the 60s and 70s. The situation is very different today.

Anyone who has been following the U.S. monthly economic data lately has noticed that the rate of inflation has been rising over the past year as the unemployment rate has fallen. Here are the numbers:

To those old enough to remember, this chart looks ominously like the first inflationary surge of the Kennedy-Johnson years:

Or even more ominously, Figure 1 looks a bit like this chart from a 1958 article by A. W. Phillips, which later became famous as the “Phillips curve.”

So, are we in for runaway inflation unless we slam on the brakes and send unemployment soaring again? You might think so from the headlines inspired by recent CPI reports, but the answer is “no,” or at least, “no time soon.”

To see why, we need to understand just what the dreaded Phillips curve is, why falling unemployment brought soaring inflation in the 1960s and 1970s, and why it is far less likely to do so now. That will require a detour into a bit of economic theory, then a review of the history of inflation and unemployment over the past six decades, and then an analysis of the psychological underpinnings of economic behavior. Here we go.

The dynamics of the Phillips curve

When the Phillips curve first came to widespread attention in the late 1950s and early 1960s, it was interpreted by many as a static policy menu. You could get unemployment down to a very low level if you were willing to tolerate a bit of inflation, or you could stop inflation in its tracks if you were willing to…