Kroll Bond Rating Agency (KBRA) releases research which discusses current inflation dynamics in the U.S. The report examines how the COVID-19 shock could be upsetting a pre-pandemic trend in place, namely, the breakdown of the Phillips Curve and the traditional tradeoff between inflation and unemployment. Several trends underlying the low inflation environment before COVID-19 still exist today. However, others could imply diverging trends for inflation and unemployment. On balance, fundamentals point to inflation temporarily accelerating to well above target levels before pulling back. Medium- to longer-term performance is expected to depend on supply-side factors, once pent-up demand and consumer behavior reset to more normal, post-pandemic levels.
The Phillips Curve tradeoff between inflation and unemployment was broken pre-pandemic, largely due to the deflationary impulse of technological advancement as well as globalization.
The same structural factors underlying the demise of the Phillips Curve may persist, especially related to labor market issues.
COVID-19 policy responses have introduced new sources of inflation and deflation.
The markets were not overly concerned about the lack of correlation between inflation and unemployment pre-pandemic because inflation was below target and U.S. Treasury yields were deemed sufficient. Above-target inflation, however, threatens to change these dynamics.
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Access for free at www.kbra.com
KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
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Joan Feldbaum-Vidra, Managing Director, Sovereigns
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Ethan Heisler, CPA, Senior Director, Strategy
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Van Hesser, Senior Managing Director, Chief Strategist
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