Investing.com -- Federal Reserve Governor Adriana Kugler delivered a speech today at the Whittington Lecture, McCourt School of Public Policy, at Georgetown University, Washington D.C., discussing the relationship between inflation and unemployment, and her views on the state of the U.S. economy.

Kugler stated that the U.S. economy remains solid, with real gross domestic product (GDP) growing 2.5 percent in 2024. Consumer spending continued to drive this growth, despite a decline in retail sales last month. The labor market remains healthy, with payroll job gains averaging 189,000 per month over the past four months, according to the Bureau of Labor Statistics (BLS). The unemployment rate has remained at 4 percent since November, indicating a stable labor market.

Inflation has decreased significantly since peaking in mid-2022, though it remains somewhat above the Federal Open Market Committee's (FOMC) 2 percent objective. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, is expected to show a 2.4 percent increase on a 12-month basis in January, based on consumer price index and producer price index data.

The FOMC began reducing the policy interest rate in September, which had been restricting aggregate demand and suppressing inflation. The rate was reduced by 100 basis points through December, leaving it at moderately restrictive levels. At the FOMC's latest meeting in January, the decision was made to keep the policy rate steady, due to diminished risks to employment and ongoing risks to inflation.

Kugler also discussed the impact of inflation during the pandemic period, noting that high inflation can significantly affect Americans' purchasing power. Understanding inflation dynamics is critical for implementing policies that maintain stable prices and a strong labor market.

Inflation during the pandemic came in waves, starting with a spike in food prices due to increased demand and supply chain issues. The Russian invasion of Ukraine in 2022 caused a second wave of food inflation. Core goods inflation also increased due to a shift in consumer demand from services to goods and additional supply chain disruptions. A third wave of inflation came from services costs, excluding housing, due to a tight labor market and wage increases. Finally, housing services inflation increased as Americans moved from city apartments to suburban homes, causing a rise in housing prices.

Kugler highlighted the importance of the Phillips curve model, which explains inflation dynamics and the tradeoff between inflation and unemployment. This model was updated to include inflation expectations and measures of "cost-push" pressures such as core import prices. The model was further augmented to include the ratio of job vacancies to the level of unemployment, a measure of labor market tightness, and a new monthly shortages index to capture supply chain disruptions.

Kugler concluded that no single model can fully explain every possible state of the economy, and policymakers must be open to various options and frameworks. She emphasized the importance of being attentive to the latest contributions from academia and empirical practitioners. Despite the unique challenges posed by the pandemic, the models presented have had some success in capturing key features of the inflation process during this period.

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