Inflation and growth continue to surprise on the upside, and tame commentary from the Fed Chair has only added to animal spirits - will this all end badly?
A rule of thumb of mine (the O’Sullivan Zombie Rule of Economic Modelling) states that once a model has been written off as dead by the economics profession, it makes a comeback. The ‘death of budget deficits (under Clinton)’, the ‘death of value investing’ and a ‘this time is different approach’ to debt are some examples.
The latest one I have in mind is the Phillips Curve – an economic relationship researched by the New Zealand economist Bill Phillips that maps an inverse relationship between unemployment and inflation, and subsequently developed by prominent economists like Milton Friedman and Robert Lucas.
Over the past decade, a period characterised by low inflation, low interest rates and low unemployment, a number of economists have sketched the obituary of the Phillips Curve. James Bullard, a prominent Federal Reserve official, has stated ‘If you put it in a murder mystery framework – “Who Killed The Phillips Curve?”– it was the Fed that killed the Phillips curve’. Peter Hooper and Frederic Mishkin have pondered ‘The Phillips Curve – dead or Alive’, while a 2022 discussion paper from the Fed wondered ‘Who Killed the Phillips Curve? A Murder Mystery’.
Source : [Is Inflation Now Out Of Control?](www.forbes.com/sites/mikeosullivan/2023/02/17/is-inflation-now-out-of-control/) by Mike O'Sullivan, Senior Contributor - Forbes - Investing by Mike O'Sullivan, Senior Contributor / February 17, 2023