from the Chicago Fed
The current debate on monetary policy centers around the issue that inflation has remained weak and below expectations, despite a relatively strong labor market. It is unclear when policymakers can expect inflation to rise, which could signal a need to raise interest rates.
Economists often focus on the negative relationship between the unemployment rate and wage growth as a gauge of future inflation.1 In this Chicago Fed Letter, we show that the worker quit rate, a proxy for the pace of job switching in the U.S. labor market, is also a strong predictor of nominal wage growth. This is not surprising, given that job switching tends to reflect individuals moving up a “job ladder” to higher-paying jobs. Nevertheless, the strength of the relationship is striking. The quit rate also helps predict the inflation gap, which is the difference between actual and long-run expected inflation. Our analysis suggests that one reason inflation currently remains below expectations is that the quit rate is rising but remains relatively low, despite overall growth in the labor market and a rapidly declining unemployment rate. As the quit rate nears its pre-recession pace, it may be predictive of increased wage growth and, ultimately, higher inflation.
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Source: https://chicagofed.org/~/media/publications/chicago-fed-letter/2015/cfl337-pdf.pdf?la=en