ABSTRACT
In the past few years the United States has enjoyed the unique economic duet of very low unemployment and declining price inflation. Price inflation remained in check from 1996 through 1998 even though unemployment rates fell further and further below 6 percent. It appeared natural to suspect that the balance point for US labor markets should be recalibrated. Inflation is not dead. However, recent supply shocks have shifted wage and price inflation to a lower zone. This chapter discusses the evolution of the standard model of inflation. Most of the recent controversy about a new economy without the risk of inflation has focused on an allegedly lower non-accelerating inflation rate of unemployment (NAIRU). The sensitivity of wage inflation to the unemployment rate has been found to be roughly 50 percent. In other words, for each 1 percentage point that the unemployment rate falls below the NAIRU for one year, wage inflation rises by roughly 0.5 percentage point.
