ABSTRACT
Historically, inflation has followed a fairly predictable course in relation to the business cycle. Inflation typically rises during an economic expansion, peaks slightly after the onset of recession, and then continues to decline through the first year or two of recovery. During the present US expansion, however, inflation has taken a markedly different path. Modern versions of the Phillips curve incorporate several features that differentiate them from earlier descriptions of the behavior of nominal wages and prices. The evidence from the dynamic simulation indicates that compensation growth has displayed unexpected restraint during this expansion. The out-of-sample forecasts consistently overpredict compensation growth beginning in the fourth quarter of 1992. Contrary to its behavior in previous expansions, price inflation has not accelerated in the six years since the 1990–91 recession.
