NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases research which discusses current inflation dynamics in the U.S. The report examines how the COVID-19 shock could be upsetting a pre-pandemic trend in place, namely, the breakdown of the Phillips Curve and the traditional tradeoff between inflation and unemployment. Several trends underlying the low inflation environment before COVID-19 still exist today. However, others could imply diverging trends for inflation and unemployment. On balance, fundamentals point to inflation temporarily accelerating to well above target levels before pulling back. Medium- to longer-term performance is expected to depend on supply-side factors, once pent-up demand and consumer behavior reset to more normal, post-pandemic levels.
- The Phillips Curve tradeoff between inflation and unemployment was broken pre-pandemic, largely due to the deflationary impulse of technological advancement as well as globalization.
- The same structural factors underlying the demise of the Phillips Curve may persist, especially related to labor market issues.
- COVID-19 policy responses have introduced new sources of inflation and deflation.
- The markets were not overly concerned about the lack of correlation between inflation and unemployment pre-pandemic because inflation was below target and U.S. Treasury yields were deemed sufficient. Above-target inflation, however, threatens to change these dynamics.
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