How do the unemployment rate and consumer price index relate to one another? An observable inverse correlation between unemployment rates and CPI exists that can be best explained by the fundamentals of supply and demand. As the demand for jobs increases, wage inflation will decrease as employers recognize they do not need to offer high pay to attract employees. The opposite is also true. When the job market strengthens, employers will offer higher salaries to incentivize the limited number of prospective employees to come work for them, therefore increasing wage inflation. Wage inflation relates to inflation in general because as businesses pay more for labor, a major input cost, they consequently drive up prices of goods and services leading to inflation.
In the graph above, when the unemployment rate spikes upwards, the median CPI drops, showing the inverse relationship between the two. CPI is essentially a measure of the changes in price of market baskets, including goods and services, purchased by households. Inflation rates are indirectly reflected through this measurement. What is also important to note is that, over time, the two will normalize as unemployment stabilizes relative to the inflation rates.
U.S. inflation (CPI) and unemployment rates in the 1960s
- Why might it be that, given enough time, the curve would eventually level out?
- Is it theoretically feasible to control unemployment rates using inflation rates?
Nate Abercrombie and Maddox Wilkinson