Phillips Curve Presages Deflation

Back of the envelope analysis:


UE rate is now 6.7%.
Almost certain to rise over next couple of months.
Probably at 7% early in '09.

The most optimistic estimates have recession ending about halfway thru '09.
Stimulus program heavy on public works will be slow to implement.

In recent recessions, UE has continued to rise for at least a year afterward.
So a fairly optimistic scenario would have UE rising to 8% by YE '09 and staying there for a year.
That would give average UE around 7.5% for '09 and 8.0% for '10.

Typical estimates put NAIRU at 5%.
So UE gap is 2.5% for '09, 3% for '10.

Typical Phillips curve coefficient is around 0.5
which implies inflation rate will fall by 1.25% in '09
and an additional 1.5% in '10
and continue to fall.

Current inflation rate is around 2%


You do the math