Perhaps the most important question about today’s economy is how far the unemployment rate can fall until we have to be worried about inflation.
Some thought that an unemployment rate below six percent would spark inflation — I didn’t agree, and addressed that in a column. With the unemployment rate at 5.6 percent, many remain concerned that inflationary pressures are around the corner.
I don’t agree. Looking at the labor market as a whole, I see quite a bit of slack. My guess is that the economy can continue to add jobs at a very healthy clip and that the unemployment rate can fall a good bit further without sparking higher inflation. This obviously has implications for Fed policy, and suggests that the Fed can keep its foot off the brake longer than many estimates suggest.
But I could be wrong. And this simple chart from Deutsche Bank’s Torsten Slok suggests I may be.