The primary objective of central bankers is to maintain low and stable inflation. While this task was never easy, the recent bout of large, adverse supply shocks—from the pandemic to the Russian invasion of Ukraine—combined with massive demand stimulus (both fiscal and monetary) made the task of securing price stability far more difficult.

Our favored indicator of the inflation trend, the Dallas Fed’s trimmed mean PCE price index, rose at a 4.4% annual rate over the past six months, and seems to be accelerating. Furthermore, while activity has slowed, the U.S. labor market remains extraordinarily tight: there are nearly two vacancies for each person who is unemployed—well above the peaks of the early 1950s and the late 1960s.

Against this background, a large, recession-free disinflation seems highly unlikely to us (see our recent post). In theory, a plunge of vacancies could cool a very hot labor market without raising unemployment (see, for example, Waller). In practice, however, the behavior of the relationship between vacancies and unemployment since 1950—what is known as the Beveridge Curve—suggests that this is very unlikely (see Blanchard, Domash and Summers).

That is the subject of this post….