Alternative measures of labour market slack improve the analysis of inflation
News, Staff memo Can alternative, more disaggregated measures of labour market slack improve inflation forecasts? Caroline Flodberg, Marie Hesselman and Mårten Löf investigate this issue in a Staff memo.
The Riksbank mainly uses aggregate measures of total unemployment or various gaps to analyse the relationship between resource utilisation in the labour market and inflation. However, many other measures of labour market slack – such as long-term unemployment and the employment rate in the 25-34-year-old age group – have higher covariance with inflation than total unemployment.
Nevertheless, no single indicator is clearly better than others at predicting the rate of inflation, and it is important which period of time is examined. The results should therefore be interpreted with some caution. Overall, however, they suggest that the analysis of inflation could be improved by supplementing it with a broader set of measures of resource utilisation in the labour market.
By Caroline Flodberg, Marie Hesselman and Mårten Löf, advisers at the Monetary Policy Department.
A Staff Memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the appropriate Head of Department. The opinions expressed in staff memos are those of the authors and are not to be seen as the Riksbank’s standpoint.