For decades, textbooks have explained inflation behavior with Friedman (1968)’s Phillips curve: the inflation rate depends on expected inflation and the deviation of unemployment from its natural rate. Yet this theory has always been controversial, and skepticism has been rampant in the decade since the 2008 financial crisis. For several years following the crisis, researchers such as Stock (2011) and Coibion and Gorodnichenko (2015) puzzled over a “missing deflation:” inflation did not fall much despite a sharp rise in the unemployment rate. More recently, as the economy has approached full employment, economists have puzzled over the failure of inflation to rise toward the Federal Reserve’s target of 2 percent. According to Bernstein (2017), recent low inflation is “puzzle #1 in economics.”

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