Thursday, July 02, 2009

Blessing In Disguise?

The bad news? The U.S. unemployment rate continues to rise and will almost certainly hit double digits soon.

The good news? Historically, high unemployment has served to keep inflation in check:

A rule of thumb is that inflation doesn't become sticky until the unemployment rate dips below 5%. Since 2001, the Nonaccelerating Inflation Rate of Unemployment, or NAIRU, the rate at which economists estimate the labor market can trigger inflation, has stood at 4.8% unemployment, according to the Congressional Budget Office.

In the first quarter, the spread between the NAIRU and the actual unemployment rate averaged 3.3 percentage points, the widest spread since 1983, when unemployment hovered around 10%. A high spread suggests the labor market needs to get stronger before inflation is a concern.

So for the moment at least inflation doesn't seem to be something that Americans should be too worried about. As long as they have a job.

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