Phillips curve “flattening:” Should we worry?

Economists do live in their own little world.

But an occasional glimpse into it can be rewarding.

So, even if you don’t know the difference between a Phillips Curve and a Laffer curve, you might find a moment or two spent reading some recent Reserve Bank research, to be well spent.

There is a link to it, on the front page of the Reserve Bank’s website, at rba.gov.au.

We must admit that its title is not immediately inviting.

“Understanding the flattening Phillips Curve” is, perhaps, a little short of grabby.

But it deals with some issues that will have a direct impact, one way or another, on your future.

First things first, though.

The Phillips curve tracks the relationship between the rate of inflation and unemployment .

The trouble, according to Reserve Bank Economists Kenn Kuttner and Tim Robinson, is that “in recent years, inflation appears to have become less responsible to fluctuation in output and unemployment.

“That is, the Phillips curve has become flatter.”

This matters, because it affects the calculations the Reserve Bank makes, when reviewing interest rates.

The paper goes well beyond Economics I. Its calculations and reasoning are, at times, quite dense.

But there are glimpses of reality in it too, which are worth a little thought and reflection.

One is that the rise of China, as an industrial power, has fundamentally changed the way prices are set, in the wider world.

“In recent years, the greater role of China in the world economy has undoubtedly held down the price of imported manufactured goods,” the two economists say.

And they say this “may have encouraged domestic firms to be more productive.”

What do we take from that?

Perhaps that interest rate hikes might not be quite as necessary, in future, as they have been thought to be in the past.

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