Inflation

Siny Joseph, Kansas State University,
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Summary

Students will be able to explain the consistent unexpected low inflation rate despite falling unemployment rate.

Context for Use

This activity is appropriate for principles course.
Students should have prior knowledge about inflation and unemployment.
No limit on class size.
One class period of 50 mins would be sufficient for this activity.

Overview

This activity looks at the relationship between inflation and unemployment in the short run. Despite the unemployment rate consistently dropping, there has hardly been a dent on the inflation rate. This activity explores the impact of underemployment in explaining the characteristically unexpected low inflation rate.

Expected Student Learning Outcomes

By the end of this activity students will be able to reinforce their understanding of the relationship between unemployment and inflation in the short run.

Information Given to Students

Economic theory says there's a short-term tradeoff between inflation and employment. When unemployment gets low enough — when we reach "full employment" — we start to see inflation. A 3.6% unemployment today doesn't mean the same thing as 3.6% unemployment back in 1965 according to Blanchflower, who served as a central banker for the Bank of England. If our economy were truly at full employment, Blanchflower says, workers would have tons of options and employers would be forced to entice them with fat paychecks in order to recruit them. This would show up in the data as higher inflation rates. What is the reason for low inflation?
Gas prices have reached historical lows.
The labor market is upended by global trade and technology.
Corporate power is rising and union power declining so wages are stagnant.
Underemployment where people have jobs, but they're not good jobs — and they don't offer enough hours to pay the bills.

Teaching Notes and Tips

Students should have prior knowledge of inflation and unemployment.

Have a team reporter explain in words how they arrived at their choice. Circle back and get other team reporters to provide the analytical support at the doc cam or on the chalkboard. Have team reporters try to convince each other.

The following follow-up questions are recommended to facilitate the debriefing conversation:
What are the problems of measuring unemployment rate?
How has the federal reserve reacted to low unemployment and low inflation?
How will Trump tariffs impact US inflation rate?

The answers could be distributed across C and D. Instructors need to hone in on option D. Underemployment and stagnant wage growth provide some explanations to the low inflation trend despite strong labor market trends.

Assessment

Discuss types of unemployment rate measurements.