How Does Slack Influence Inflation?

7 Pages Posted: 27 Jul 2011

See all articles by Richard W. Peach

Richard W. Peach

Federal Reserve Bank of New York

Robert W. Rich

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Anna Cororaton

United States Energy Information Administration

Date Written: July 1, 2011

Abstract

Economists have long studied the relationship between resource utilization and inflation. Theory suggests that when firms use labor and capital very intensively, production costs tend to rise and firms have more scope to pass those cost increases along in the form of higher product prices. In contrast, when that level of intensity is relatively low - that is, when the economy is operating with slack - production costs tend to rise more slowly (or even fall) and firms have less scope for raising prices. Empirical evidence, however, has varied concerning the exact nature of the relationship between resource utilization and inflation. In this study, the authors reexamine this relationship by evaluating the presence of “threshold effects.” They find that the level of intensity of resource utilization must be below or above certain critical values before it can help to forecast movements in inflation.

Keywords: Phillips curve, Economic slack

JEL Classification: A10, E52

Suggested Citation

Peach, Richard W. and Rich, Robert W. and Cororaton, Anna, How Does Slack Influence Inflation? (July 1, 2011). Current Issues in Economics and Finance, Vol. 17, No. 3, July 2011, Available at SSRN: https://ssrn.com/abstract=1895526 or http://dx.doi.org/10.2139/ssrn.1895526

Richard W. Peach (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Robert W. Rich

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216 579-2928 (Phone)

Anna Cororaton

United States Energy Information Administration ( email )

1000 Independence Ave., SW
Washington, DC 20585
United States

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