The U.S. economy has seen an overall decline in inflation for nearly 15 months. But recent data has shown that there has been a subtle increase in inflation in January, which leads many to question where inflation will go next.
Many economists are able to agree on the fact that the U.S. has hit the low of inflation, that inflation should now be expected to rise. But the question is, 'to what extent will it rise?'
Economists differ in their predictions about what will happen next. If unemployment stays at a high, around 9-10 percent, many think inflation will stay at its current low levels. This is consistent with the theories behind the Phillips Curve. Recent filings for unemployment benefits seem to suggest that high unemployment is here to stay for a while, and therefore low inflation will be around as well. But even this data is murky, as many attribute the recent rise in unemployment to volatile winter conditions, and they say unemployment will continue to decline.
This issue brings about questions for the Fed as to what direction to take. The Fed prefers to have about 2 percent inflation so they are questioning what sort of steps need to be taken, if any, to address the issue at hand. The danger of having stagflation should be in the back of their mind as they develop their next move. Having high unemployment with equally high inflation could prove catastrophic to an already weak economic recovery.
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