The supply-side origins of U.S. inflation

Abstract

In recent years, we have not seen much of a negative correlation between inflation, the time series plotted in figure 1, and measures of resource slack, based on real GDP plotted in figure 2. This flattening of the Phillips curve in many countries across the world has startled monetary policymakers. In fact, it has some former policymakers ask whether the Phillips curve is dead. It is often interpreted as the disappearance of a short-run output-inflation tradeoff that central banks can exploit for stabilization purposes. In this paper I argue that this is too pessimistic an assessment. What the flattening of the Phillips curve really indicates is that recent economic fluctuations were not mainly driven by movements in aggregate demand (AD) but, instead, by joint movements in aggregate demand and aggregate supply (AS). It is these movements in aggregate supply that are at the root of the “supply-side origins of inflation” that I refer to in the title.