Expectations and the Final Mile of Disinflation
![Photo of a crowd of business people and others walking to work.](https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2024/03/LSE_2024_underemployment-inflation_crump_460.jpg?w=920)
In the aftermath of the COVID-19 pandemic, the U.S. economy experienced a swift recovery accompanied by a sharp rise in inflation. Inflation has been gradually declining since 2022 without a notable slowdown in the labor market. Nonetheless, inflation remains above the Federal Reserve’s 2 percent target and the path of the so-called final mile remains uncertain, as emphasized by Chair Powell during his press conference in January. In this post, we examine the unemployment-inflation trade-off over the past few years through the lens of a New Keynesian Phillips curve, based on our recent paper. We also provide model-based forecasts for 2024 and 2025 under various labor market scenarios.