What Keeps Inflation in Check?

It may seem obvious, but a new paper on inflation from the San Francisco Federal Reserve confirms it. The key to keeping prices from rising too quickly is keeping the public confident inflation. The paper also suggested the unemployment level is all but irrelevant to the inflation trajectory.

The San Francisco Fed economists tested what would happen to inflation with varying levels of unemployment, or if there were a lot less slack in the labor market. The results were very little change to the inflation trajectory. But when the researchers modeled what would happen if inflation expectations were to rise, they found that actual inflation would rise very quickly,  too.

That's not the only factor, though. The U.S. unemployment rate is still at a very low 4 percent, but inflation has barely touched the central bank’s 2 percent target. Some Fed policymakers continue to believe the tightening job market will at some point put upward pressure not only on wages but also on prices. At some point, inflation will be back.