In our Economic Letter, “How Much Has the Cooling Economy Reduced Inflation,” we find that the recent dynamics of inflation can be at least partially explained by patterns of excess demand in the economy. We’ve found that labor market tightness, as measured by the amount of job vacancies per unemployed individual, or V–U ratio, along with the vacancy-to-effective searchers ratio, or V–S ratio, are among the strongest measures of excess demand for forecasting inflation. The V–U and V–S ratios peaked in the first half of 2022, around the same time inflation peaked, then declined over the next two years as inflation came down.
Watch our Economic Letter video with Adam Shapiro, Vice President, Economic Research, to learn more about our measurements of excess demand and its impacts on inflation.
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