“The ideas of economists and political philosophers, right or wrong, are more powerful than we think. Practical men, who consider themselves completely free from any intellectual influence, are generally enslaved by some late economist. ”So John Maynard Keynes.
We have just come out of the so-called “liquidity trap,” says Keynes himself, when interest rates are so low that an expansionary conventional monetary policy fails to stimulate the economy, and we are faced with another situation. which is that of the so-called “Phillips curve.” The “curve”, which takes its name from the New Zealand economist Alban William Phillips, in the various formulations, indicates the relationship between current inflation, expected inflation and the unemployment rate, where an increase in employment is possible. , past a certain point, only if it is “traded” with an increase in the rate of inflation, because wage increases are passed on to prices, until the relationship no longer works. Therefore, in order to contain the dynamics of inflation, it is necessary to accept a certain level of unemployment, and then implement restrictive policies, mainly monetary.
But what is unemployment from which the compensation between inflation and unemployment is no longer acceptable? In the esoteric language of economists, this point is indicated by the “natural unemployment rate”, which indicates the level of unemployment at which inflation remains stable, in the absence of supply shocks.
Given that in recent months Western economies have experienced very strong price growth, in the face of a widespread reduction in the post-pandemic unemployment rate, several argue that the economy needs to be “cooled” by re-placing the trade-off between unemployment and inflation. a more appropriate level.
Here are some issues to keep in mind, which highlight the multidimensionality of the problem.
The Phillips model works if we are facing “demand” inflation due to an increase in global demand for goods and services and therefore if the unemployment rate is below its natural level or normal. And this seems to be happening in America, where the natural unemployment rate is 6% compared to an effective rate of 3.6%, but it does not seem to be true for Europe where unemployment, although continuous decrease is 6.2% with peaks of 6.8% in the euro area and the youth component is 13.9%.
The situation is therefore very different from the American one, with us unemployment is in any case higher and driven by the increase in raw material costs, that is, we are facing a shock of supply, which makes the estimated relationships in the past between the unemployment rate (and its increase) and the inflation rate (and its increase).
The Phillips curve, and the resulting restrictive measures, can therefore be a useful tool for the US economy, much less for the European economy.
On the other hand, in this situation, inflationary expectations are still being fed, because it is true that the “underlying” inflation, that is, net of imported and general food raw materials, is much lower than the real one, but households and businesses are reasoning. taking into account other parameters, first the shopping cart and recurring purchases, the prices of which go up, the others the production prices, which also in this case have grown much more than consumer prices.
The danger is the self-sufficiency of price growth expectations. For the main European countries, including Italy, one percentage point more than perceived inflation leads to a 0.38% increase in inflation expectations.
In a global economy, where signals are important, this can probably help explain the European Central Bank’s decision to raise interest rates, to be understood more as an indication to markets to try to cool expectations than as a measure to take care of yourself. price growth directly.
Inflationary expectations are highly variable taking into account the social and demographic characteristics of consumers: for example, many studies show that women have systematically higher inflation expectations than men, young people have lower expectations than the elderly. and people with lower socioeconomic status have higher inflation. expectations than those with higher status.
A treatment based on rising interest rates, in the face of such different situations, runs the risk of being a factor in aggravating the disease. Instead, policies are needed to change the expectations of the different objectives and can only go back to the realm of public intervention, which will be agreed at the supranational level (in our case European) and will be implemented in individual countries to have this level. of flexibility that can only cope with such a segmented situation.
Therefore, the power of the statements of economists of the past today more than ever must deal with the heterogeneity of specific situations if we want to avoid the mess in a situation of stagnation.