High Inflation + Low Unemployment, What’s the combination

US employment and unemployment data for September were released.

Non-farm payrolls added 263,000 jobs, compared to the market’s estimate of 250,000.

Unemployment rate decreased to 3.5%, while the market was expecting 3.7%.


Markets have exclaimed that the U.S. economy and employment turned out to be so good, so –

Treasury yields soared and the stock market plunged!


Doesn’t good employment mean that the U.S. economy is doing well?

If the U.S. economy is doing well, it means that businesses are doing well, otherwise who would hire so many people?

So, so, so…

Why is the stock market still plummeting?

This relates to the issue of trading themes.

Each time period, U.S. stocks are traded on a different theme.

Let’s say –

from the end of 2018 to 2019 a whole year, U.S. stocks are trading on the theme of recession, at first people are worried about the recession coming back, so U.S. stocks plummet, but then, as long as the signs of recession slowly disappear, then the stock market will keep slowly going up; and

From early 2020 to 2021, the trading theme of U.S. stocks is the spread of the new crown epidemic, the global outbreak of the epidemic, U.S. stocks continuously fall, plunge + plunge + plunge, and then superimposed on what crude oil prices collapse, hedge fund collapse and other stories, but, with the Federal Reserve lowering interest rates to 0, while implementing unlimited money printing, every bit of good news about the epidemic in this case, will bring upward movement, as the epidemic keeps abating, so US stocks keep going up and up and up.


So, if you trade U.S. stocks, one of the first things you need to figure out is

At this stage, what theme is the market trading?

From the end of 2021 to now, the trading theme for U.S. stocks, is the Fed rate hike (and the possible resulting recession), as long as the rate hike is expected to get stronger, then U.S. stocks will adjust and fall, as long as the rate hike is expected to weaken, U.S. stocks will rally and rise.

Just in the past 10 days, first the UK pension crisis, then the Credit Suisse and Deutsche Bank bankruptcy crisis, given the possibility of triggering an international financial crisis, markets have expected the Fed to potentially slow down rate hikes – so U.S. Treasury yields have fallen rapidly over the past week and stocks have risen sharply.

However, today’s employment data is so strong that it means the Fed need not worry about the U.S. economy at all, shattering the illusion that the market is slowing down interest rate hikes, so Treasury yields rose again, and U.S. stocks fell.

Some people may say, the U.S. inflation is so high, the real economic growth is also very poor, which obviously indicates that the economic situation is very bad; but, now the unemployment rate released and reached the lowest in history, which indicates that the U.S. economy is very strong – this U.S. economy, in the end is good, or bad?

The current state of the U.S. economy is.

High inflation + low unemployment

This is precisely the most classic combination of Keynesian economics, which has a technical term, called.

Phillips Curve (the Phillips Curve).

In 1958, Phillips, a New Zealand economist, based on the historical unemployment rate and the rate of change of money wages in the United Kingdom for nearly 100 years from 1861 to 1957, proposed a curve to represent the alternating relationship between the unemployment rate and the rate of change of money wages.

When the unemployment rate is low, the growth rate of money wages is high.

When the unemployment rate is high, the money wage growth rate is low or even negative.

The growth rate of wages, according to the cost-push inflation interpretation, is immediately transformed into inflation. So, just in 1960, American economists Samuelson and Solow, based on Phillips’ study, replaced the growth rate of money wages with the rate of inflation and transformed the Phillips curve into a relationship between unemployment and inflation as follows.

Higher inflation when unemployment is low.

When unemployment is higher, inflation is lower.



(a) At the beginning the economy is at the long-run equilibrium point E with a natural unemployment rate of U* (the natural rate of unemployment) and an inflation rate of π1.

If the central bank increases money issuance, it brings the economy to point A, where inflation rises to π1 and unemployment falls to U1.

Overall, the sum of the unemployment rate + inflation (U + π), as a whole, does not change much.

Thus, the Phillips curve, which became the most famous curve in the field of macroeconomics after World War II, is the best explanation of Keynesian economics reflected to the real economy.

We can use the historical data of the United States for the last 70 years or so to give you verification (see the chart below).


Based on the inflation and unemployment data for the last 70+ years in the U.S., we can roughly determine that the Phillips curve was in effect for the following time periods (shaded areas in the chart).

1950-1968, about 19 years

1987-2010, about 24 years

The former period is the post-war recovery period of the U.S. economy, while the latter period is the period of good development of the U.S. economy after a long period of stagflation.

Correspondingly, the time period in which the Phillips curve basically failed

1969-1986, about 18 years

2011-2019, about 9 years

The former period, a period of great stagflation with high inflation and high unemployment, and the latter period, a post-global financial crisis era with very low inflation and very low unemployment

I am not going to explain too much about the reasons why the Phillips curve is in effect or failing today, but I will just tell you here that since mid-2020, the unemployment rate in the U.S. has been gradually decreasing while the inflation rate has been rising exactly gradually, and by now, the inflation rate has risen to the highest and the unemployment rate has fallen to the lowest.

Whether it is the high unemployment + low inflation combination in 2020 or the low unemployment + high inflation combination now, this is precisely the result indicated by classical Keynesian economics.

Classic Keynesian economics, back!

This return of classical economics, whether for the Federal Reserve or the U.S. government, for its macro “regulation”, basically belongs to the familiar, old driver, just a reasonable trade-off between the inflation rate and the unemployment rate, to achieve a balance.

In the coming period, this is the main tone of the U.S. monetary and fiscal policy.


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