Phillips Curve: Maybe, Maybe Not. Markets Outlook at the End

David R. Kotok
Tue Sep 13, 2022

Barron’s ran this column on Friday afternoon before Labor Day weekend. It’s worthwhile. It discusses the Phillips curve and versions modified for current usage. Here’s the link:

We added a comment to the article and included a chart, which Barron’s published.  Several Barron’s readers communicated responses, and we thank them for doing so.

Here’s our comment, with chart:

Here’s a half-century history of the annual data point entries for a Phillips curve using the CPI and the U3 unemployment rate. We’ve added an interim data point to show where we are right now. In other words, if things don’t change in a few more months, this is what the chart will look like on December 31.

My takeaway is that the Phillips curve doesn’t help forecast outcomes, so I must take a view opposed to that articulated by some folks quoted in the Barron’s column. Perhaps it might be different if the jobs openings numbers were a million or two million fewer than the jobseekers numbers. But that’s not the case today.

The Phillips curve debate has raged for a long time. And so it goes. Here’s the chart. See if you can figure out a way to make a reliable forecast. I can’t.



Phillips Curve CPI Chart - Cumberland Advisors Market Commentary - Phillips Curve- Maybe, Maybe Not. Markets Outlook at the End by David R. Kotok.jpg

To embellish and enhance this discussion (debate), here’s a very timely speech by Catherine Mann, who is a member of the Monetary Policy Committee of the Bank of England. Previously, she was global chief economist at Citi and chief economist at the OECD. In her speech, delivered on Sept. 5, 2022, to the 53rd Annual Conference of the Money Macro and Finance Society, University of Kent, she discusses the Phillips curve’s shifting due to changes in inflation expectations. We strongly recommend this speech to readers.

“Inflation expectations, inflation persistence, and monetary policy strategy,”

The following day, on Sept. 6, authors at the Federal Reserve Bank of San Francisco weighed in on this Phillips curve issue in “Finding a Soft Landing along the Beveridge Curve,”

To complete the conversation, here’s the link to a critical September Brookings paper: “Understanding US inflation during the COVID era,” This paper argues the case that the unemployment rate is a flawed metric to follow as long as the number of job opportunities exceeds the number of job seekers.

Our market view remains in place: interest rates heading higher, wages heading higher, Fed tightening persists, global geopolitical risk intensifies.  We have a cash reserve in the US Equity ETF portfolio.  Of course, market positions may change at any time.


David R. Kotok
Chairman & Chief Investment Officer
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