In recent times, the world’s economy has been on a roller coaster, especially when it comes to inflation and jobs. On one side, there’s the challenge of keeping the prices of goods and services from soaring too high, too fast. On the other, there’s the goal of making sure there are enough jobs for everyone. Central banks, which are like the economy’s pilots, are steering through these challenges in a new way, aiming to achieve what’s called “immaculate disinflation.”

What Is “Immaculate Disinflation”?

“Immaculate disinflation” sounds like a fancy term, but it’s really about achieving a sweet spot in the economy where the prices of things stop rising so quickly and settle down to a more manageable pace, all without causing a bunch of people to lose their jobs. It’s a big deal because, traditionally, when governments and central banks have tried to slow down inflation, it often led to higher unemployment. But now, the aim is to cool down those price hikes without making the job market suffer. It’s like trying to land a plane gently without causing any bumps for the passengers.

The Global Picture on Prices

Globally, we’re seeing a concerted effort by the pilots of the economy (a.k.a. central banks) to adjust the settings just right. They’re tweaking interest rates, which are basically the cost of borrowing money, to keep inflation from going wild. If it costs more to borrow money, businesses and people might spend less, which can help slow down price increases. This careful calibration is showing signs of success worldwide, as reports indicate that inflation is starting to chill out in places like the US, Europe, and other major economies. This means things aren’t getting expensive as quickly as they were, which is good news for everyone’s wallets.

How Central Banks Are Making It Happen

Central banks have been on their toes, getting smarter and more strategic in how they tackle the inflation beast. They’re not jumping the gun; instead, they’re adjusting interest rates carefully to strike a balance. It’s a bit like finding the perfect temperature on a thermostat — too high and the economy might overheat with too much inflation, too low and the job market could freeze up. The recent global challenges, including the pandemic and geopolitical issues, have made this task even trickier.

Will This Time Be Different?

Contrary to the narrative of ‘immaculate disinflation,’ my recent study suggests that the battle against inflation is far from over. The optimism reflected in current economic reports may be premature.

As shown in my analysis, there’s a significant lag of about 24 months between changes in the Federal Funds Effective Rate and corresponding movements in the unemployment rate. This delay indicates that the full effects of recent interest rate hikes can yet manifest in unemployment figures.

The graph from my study illustrates this relationship over the past several decades. While inflation rates may show signs of subsiding, historical patterns indicate that the corresponding influence on unemployment may still materialize. It’s crucial to recognize that a successful inflation reduction often carries the heavy cost of increased unemployment, which has not been factored into the rosy predictions.

The evidence from my research underscores the need for a cautious approach in declaring victory over inflation. It’s essential to be vigilant and not overlook the lagging response of unemployment to monetary policy. While central banks have acted swiftly, the true test of their efforts will only be visible in the labor market’s resilience in the months ahead.