Understanding Post-Pandemic Surprises in Inflation and the Labor Market

RePEc Short ID: pge110
ORCID iD: 0000-0002-7922-9494

Gelain, Paolo; Lopez, Pierlauro

doi:10.26509/frbc-ec-202411

Journal Article

Understanding Post-Pandemic Surprises in Inflation and the Labor Market

Abstract: Since the COVID-19 pandemic, the United States has experienced sharply rising then falling inflation alongside persistent labor market imbalances. This Economic Commentary interprets these macroeconomic dynamics, as represented by the Beveridge and Phillips curves, through the lens of a macroeconomic model. It uses the structure of the model to rationalize the debate about whether the US economy can expect a hard or soft landing. The model is surprised by the resiliency of the labor market as the US economy experienced disinflation. We suggest that the model’s limited ability to capture this resiliency is a feature of using a linear model to forecast the historically unprecedented movements seen after the pandemic among inflation, unemployment, and vacancy rates. We explain how, by adjusting the model to mimic congestion in a tight labor market and greater wage and price flexibility in a high-inflation environment, as during the post-pandemic period, the model can then capture what has been a path consistent with a soft landing.

Keywords: post-pandemic economy; inflation; Beveridge curve; Phillips curve; labor market; business cycles; monetary policy; Macroeconomic modeling;

https://doi.org/10.26509/frbc-ec-202411