How Have Shanghai, Saudi Arabia, and Supply Chains Affected U.S. Inflation Dynamics?
18 Pages Posted: 15 Jan 2019 Last revised: 17 Jul 2019
Date Written: 2019
Understanding and forecasting inflation has always been a key focus of macroeconomics and monetary policymaking. Historically, many macroeconomists and central banks have relied on the â€œPhillips curveâ€� framework for this purpose. Recently, however, the Phillips curve framework has not been performing well. This article examines a number of possible explanations for the breakdown of the â€œPhillips curveâ€� relationship between slack and inflation. These explanations include the possibility that the curve may have flattened or shifted, that standard measures may not be capturing key aspects of the relationship, or that a series of â€œunfortunateâ€� and unprecedented events may have obscured the underlying relationship. Each of these explanations has some merit and support, but each seems unable to explain how inflation dynamics have evolved over the past decade. This article suggests that what is missing is a more comprehensive treatment of how globalization has affected domestic prices, through channels such as increased trade flows, the greater economic heft of emerging markets, and increased ease of using global supply chains to shift parts of production to cheaper locations. This greater role for globalization in explaining inflation, however, does not mean that the standard Phillips curve framework is â€œdead.â€� Rather, macroeconomists and monetary policymakers should update their existing models in two key ways: to include global parameters more explicitly and allow these parameters to adjust over time with the world economy.
JEL Classification: E13, E37, E52, F44, F62
Suggested Citation: Suggested Citation