Ben Emons, Columnist

The Shape of the Phillips Curve Should Worry Markets

Inflation may not be as stable as generally believed, and the bigger risk may be disinflation.

August 23, 2017 at 10:45 AM UTC

Ben Emons is the founder of FedWatch Advisors, a firm specialized in analysis and investing around the Fed. Previously he was associated with NewEdge Wealth as head of fixed income and Medley Global Advisors as Managing Director of Global Macro Strategy. The opinions expressed are his own.

Curves matter in markets.
Photographer: Daniel Berehulak

Provide news feedback or report an error

Site feedback:

Take our Survey

This article is for subscribers only.

There’s lots of debate over whether the Phillips curve is broken, but almost none of it centers on the shape of the curve, which may be the more important topic. The Phillips curve, which essentially suggests there is in inverse relationship between unemployment and inflation, has become abnormally vertical in recent years.

The steepness suggests inflation should stay stable to around current rates of unemployment. But the thing is, the unemployment rate has been between 4.3 and 4.7 percent since the spring of 2016 and yet the inflation rate has drifted down to 1.7 percent from 2.7 percent. That implies that inflation may not be as “stable” as generally believed, and that the bigger risk may be disinflation. Stagnant wages, lower energy prices and technological disruption are already causing deflationary trends in core goods and negatively affecting broad inflation expectations.