Weekly Economic Update: November 20 – November 24, 2017

November 20, 2017

CHART OF THE WEEK

No More “Phillips Curve” (Low Unemployment No Longer Correlated with High Inflation)

A 1958 paper by economist A.W. Phillips found that the unemployment rate was inversely related to the rate of change of wages in Britain from 1861-1957. His observation evolved into a belief that there was a stable, inverse relationship between unemployment and inflation rates, which was also observable in the United States during the 1960s, as shown in the left panel. Policymakers became convinced they could choose any combination of unemployment and inflation rates along the Phillips curve by easing or tightening monetary policy, i.e., raising or lowering inflation. High rates of inflation and unemployment in the 1970s discredited that notion, but it reasserted itself after the last recession, even though it remains invalid, as the right panel shows.

Inflation and unemployment will be among the topics discussed during next week’s hearing in which JEC will examine the economic outlook with Federal Reserve Chair Janet Yellen.

LAST WEEK

Category (percentage change from same month last year)	October	September	August
Headline CPI	2.05%	2.23%	1.93%
Core CPI (excludes food and energy)	1.77%	1.69%	1.69%

Noteworthy: Since reaching a high of 2.26% in January, the core CPI had trended downward or remained relatively flat until October, when it to rose to 1.77%. The headline CPI declined from 2.23% to 2.05%, mostly as a result of falling energy prices. BLS noted that the main upward pressure on the CPI came from the shelter index, which measures home rental costs and owner’s equivalent rent (the imputed rental cost of living in one’s own home).

Industrial Production and Capacity Utilization (October 2017)

The Fed’s industrial production index covers nearly everything tangible produced in the United States. Capacity utilization measures how much firms actually produce relative to their maximum potential output.

Category	October	September	August
Industrial production (year-over-year percentage change)	2.81%	1.55%	1.16%
Capacity utilization (percent of capacity in active use)	77.0%	76.0%	75.8%

Noteworthy: After being temporarily suppressed by Hurricanes Harvey and Irma in August and September, industrial production and capacity utilization increased by 2.8% from October last year.