Low unemployment = Subdued inflation?

The record low levels of unemployment and its ramifications currently are somewhat puzzling. Under normal circumstances, this would generate a wage growth in the economy, which in turn triggers inflation. But, that is not what is happening now.

The twin dynamic of Globalization and Technology are severely restraining any wage growth. Normally, the low unemployment level usually increases the job churn rate in the economy, which is the rate at which people keep changing jobs. It’s rather unusual that not many people are changing jobs in this expansion, primarily due to anemic wage growth. This is against an economic backdrop that has been steadily adding jobs steadily.

This explains the inflation conundrum to some extent that has been bothering the policy makers and the economists alike. This is complicating the Fed’s decision to raise the interest rates.

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