unemployment drops below 4 percent. in the late 1960s, unemployment remained at or below 4 percent for four years, and during that time inflation rose steadily from under 2 percent to almost 5 percent. by contrast, the late 1990s episode of below - 4 - percent unemployment was quite brief, and during the episode and surrounding quarters inflation was reasonably stable and remained below 2 percent. to explore the phillips curve relationship in these two periods more closely, we need to bring in the concept of the natural rate of unemployment. in standard economic thinking, an unemployment rate above the natural rate indicates slack in the labor market and tends to be associated with downward pressure on inflation ; unemployment below - 5the natural rate represents a tight labor market and is associated with upward inflation pressure. figure 3 repeats figure 2 but replaces unemployment with labor market slack as measured by unemployment minus the cbo ’ s current estimate of the natural rate of unemployment at each point in time. 6 periods of tight labor markets are shaded. during the great inflation, inflation generally rose in the tight, shaded periods and fell in the unshaded ones, just as conventional phillips curve reasoning predicts. from 1995 to today, the large and persistent swings in the gap between unemployment and the natural rate were associated with, at most, a move of a few tenths in the inflation rate. comparing the shaded and unshaded regions, you might see some association between slack and the minor ups and downs in inflation, but the pattern is not at all consistent. it is evidence like this that fuels speculation about the phillips curve ’ s demise. whether dead, sick, or merely resting, many of the questions about the phillips curve come down to figuring out what changed between these two periods, and why. let us turn to a conceptual framework for examining these questions more systematically. a simple framework for understanding changes in the jobs - inflation relationship a natural starting point is the simplest form of a phillips curve equation, which posits that inflation this year is determined by some combination of current labor market this estimate is the cbo ’ s current assessment of what the natural rate was at each period in the sample, not a measure of the natural rate as perceived in real time. i discuss the importance of this distinction in powell ( 2018 ). - 6slack, inflation last year, and some other factors that i will leave aside for this discussion ( figure 4 ) : 7 inflation ( t ) = - b slack ( t ) + c inflation ( t - 1 ) + other

to which cost pressures have been restrained by substantial slack in the utilization of productive resources. notably, the unemployment rate remains fairly close to last fall ’ s peak and is currently about 5 percentage points above the rates that prevailed just before the onset of the financial crisis. trimmed - mean and median cpi measures are published regularly by the federal reserve bank of cleveland ; these indicators are constructed using the distribution of monthly price changes for the disaggregated components of the cpi. the median cpi inflation rate is the price change at the center of this distribution, and the trimmed - mean cpi inflation rate is a weighted average of all components excluding the most extreme price increases and decreases. for further information, see www. clevelandfed. org / research / data / usinflation / chartsdata / index. cfm. in gauging the magnitude of prevailing resource slack and the associated restraint on price and wage increases, it is essential to consider the extent to which structural factors may be contributing to elevated rates of unemployment. for example, the continuing high level of permanent job losers may be a sign that structural impediments – such as barriers to worker mobility or mismatches between the skills that workers have and the ones that employers require – are hindering unemployed individuals from finding new jobs. the recent behavior of unemployment and job vacancies – somewhat more vacancies are reported than would usually be the case given the number of people looking for work – is also suggestive of some increase in the level of structural unemployment. on the other hand, we see little evidence that the reallocation of workers across industries and regions is particularly pronounced relative to other periods of recession, suggesting that the pace of structural change is not greater than normal. moreover, previous post - world - war - ii recessions do not seem to have resulted in higher structural unemployment, which many economists attribute to the relative flexibility of the u. s. labor market. overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors. 3 the public ’ s expectations for inflation also importantly influence inflation dynamics. indicators of longer - term inflation expectations have generally been stable in the wake of the financial crisis. for example, in the federal reserve bank of philadelphia ’ s survey of professional forecasters, the median projection for the annual