One of the most fundamental relationships in all of economics -- between the unemployment rate and inflation -- appears to be broken.
Historically, these metrics have tended to be inversely correlated. When unemployment was low, inflation was high, and vice versa.
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This relationship was especially robust in the 1970s, which saw inflation twice surge into the double digits due to skyrocketing oil prices that, in turn, had been triggered by energy crises in 1973 and 1979.
Over the past decade, however, this relationship seems to have broken down. Despite the fact that the unemployment rate is at only 4.4% today, which is very low, inflation remains stubbornly below 2%, which is the level the Federal Reserve associates with a healthy economy.
"If I were Janet Yellen, I'd probably be putting on a brave face about it as she is by pointing to cheaper cellphones, drug prices, and other special things that will all go away. But I'm not very confident in that explanation," said Alan Blinder, a former vice chairman of the Federal Reserve and the current vice chairman of the Promontory Interfinancial Network.
"It's not that I have a better explanation," Blinder continued. "I can't sit here and say that Janet Yellen and the Fed have it wrong and here's why it's actually happening. I'm scratching my head about it, as I think most economists are."
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