Not Seasonally Adjusted
Inflation and unemployment usually move in opposite directions. By creating slack in the economy, rising unemployment puts the brakes on wage increases, causing inflation to slow. But there have been periods when the inverse relationship breaks down. From the mid-1970s to the early 1980s, the U.S. was beset by stagflation. Unemployment was high as a result of three recessions between 1973 and 1982 while inflation also was high due to questionable policy decisions by the government. The last of these recessions in 1981 and 1982 was a byproduct of the Federal Reserve’s strategy to wring excess inflation from the economy by raising the target federal funds rate as high as 20 percent. (Currently it stands between 0 and 0.25 percent.) The Fed’s plan worked, setting the stage for a 25-year era of low inflation, low interest rates and rising asset prices. The inverse relationship broke down again in the 1990s when both inflation and unemployment fell. Then-Federal Reserve Chairman Alan Greenspan believed it was not necessary to raise interest rates even as unemployment sank to 3.8 percent, well below the 5 percent level considered to be full employment. Chairman Greenspan saw that rising productivity resulting from the expanding use of computers would tamp down inflation. But the very low interest rates contributed to the formation of two asset bubbles – technology in the late 1990s and real estate from about 2002 until 2007. Today the inverse relationship has been restored with a low 1.6 percent gain in the consumer price index last year coupled with a high average unemployment rate of 9.6 percent. Inflation is expected to remain tame in the next two years due to slack in the economy, although energy and commodity prices may be volatile. In the longer term, inflation could become problematic as high levels of public sector borrowing crowd out rising demand for credit from the private sector, pushing interest rates higher. In an inflationary era, hard assets such as gold, commodities and real estate would tend to outperform fixed income assets such as bonds.