Economic Letter | How Much Has the Cooling Economy Reduced Inflation?

Adam Shapiro, Vice President at the Federal Reserve Bank of San Francisco, discusses his Economic Letter on excess demand and inflation that he co-authored with Regis Barnichon, Senior Research Advisor.

The video discusses how 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.

You can find more information on our measurements of excess demand and its impacts on inflation by watching this video, and by reading our Economic Letter.

https://www.frbsf.org/research-and-in...

Regis Barnichon

Senior Research Advisor

https://www.frbsf.org/our-people/econ...

Adam Shapiro

Vice President

https://www.frbsf.org/our-people/econ...