Relation Between Inflation Rate and Unemployment

Topics: Unemployment, Inflation, Monetary policy Pages: 5 (1769 words) Published: October 6, 2012
Eurozone unemployment and inflation both rise
01 March 2012 by Daniel Mason

Eurozone unemployment rose to a record high in January, while inflation in the currency bloc has also continued its upward trend - a combination described by economists as "unpalatable" and a "double whammy of bad news".

The jobless rate in the 17-member currency bloc was 10.7 per cent in January, up from 10.6 per cent in December, according to statistics published today by Eurostat. It means that, in January, there were 16.9 million people out of work in the eurozone. Meanwhile in the European Union as a whole, unemployment increased from 10 per cent in December to 10.1 per cent in January, leaving 24.3 million people without a job.

Spain continued to suffer the highest jobless rate in the eurozone at 23.3 per cent, as well as the highest youth unemployment at 49.9 per cent. It was followed by Greece, which had an jobless rate of 19.9 per cent in November, the latest available figure. In Italy, unemployment hit 9.4 per cent in January, its highest level since 2001. The lowest rates were in Austria, 4 per cent, the Netherlands, 5 per cent and Luxembourg, 5.1 per cent.

In a separate report, Eurostat estimated that euro area inflation crept up to 2.7 per cent in February, compared with 2.6 per cent in January. Howard Archer, chief European economist at IHS Global Insight, said it was a "double whammy of bad news for the eurozone". The rise in inflation was "particularly bad news for consumers", he said, because they faced not only high unemployment but squeezed purchasing power. Hopes that inflation would fall had been "scuppered" by high oil prices, Archer added in a research note.

"With the eurozone in serious danger of enduring a further gross domestic product decline in the first quarter of 2012 at least, and with business confidence still generally weak despite largely coming off recent lows, the likelihood is that the eurozone unemployment rate will move significantly higher," he said. He predicted that the rate would reach 11 per cent later this year, with companies under pressure to contain labor costs.

Similarly, Ben May, European economist at Capital Economics, described the latest figures as an "unpalatable combination". He pointed out that there were "firmer signs" of unemployment rising in the core countries of the eurozone, with month on month increases in Germany, France and the Netherlands. "All this, coupled with the prospect of continued fiscal austerity across large swathes of the region and still subdued consumer sentiment, suggests that further falls in eurozone household spending are likely this year," he said.

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The relationship between inflation and unemployment has been a central topic in macroeconomics. For some time, it was believed that there was a trade-off between the two variables since the investigation of Alban William Phillips (1958), who documented a negative correlation in U.K. data, which has been named as “The Phillips curve”. Since then, his approach has been considered as base, because a similar relationship between the inflation rate and unemployment rate shown in “The Phillips curve” exists over specific sample periods and even cyclical periods have been identified that policymakers could exploit. It is true to say that the unemployment rate and the inflation rate play important roles in determining the financial situation during an economic downturn. Inflation is caused by the alterations in the supply of money, which has the effects of inflation include loss in the real value of money and other monetary items over time. And the demand for labor is determined by the price of the company’s output and the productivity of the workers. When unemployment rate is low, the demand for labors increase and the workers are put in the position of commanding...
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