This is not your father's inflation — and that's good news. Business cycles often end when higher inflation causes a country's central bank to raise interest rates, slowing the economy and, perhaps, triggering a recession. The good news: The next recession may be delayed, because the Phillips Curve has shifted.
The Phillips Curve is an analytical tool used by economists. It shows the relationship between inflation and unemployment. In general, as unemployment goes down, inflation goes up, because companies compete for scarcer labor by offering higher wages. Wage increases are then passed along to consumers in higher prices. So: Preventing or slowing higher inflation often relies on higher interest rates, even if that risks recession.
By traditional Phillips Curve standards, the U.S. economy appears ready for higher interest rates. At 4.3 percent in May, the U.S. unemployment rate is at a 16-year low. Since December 2015, the Federal Reserve has raised short-term interest rates four times, though they remain at historically low levels, between 1 percent and 1.25 percent. There's been much speculation about the Fed's next rate hike.