The natural rate of inflation is a concept that I explored in a paper I delivered to a Conference on Social policy as If People Matter at Adelphi University in Garden City New York on Long Island in Novmember of 2004. The paper is readable on the internet by googling Harold Chorney. It appears as the fourth and fifth item on the first page of the results.The URL is www.adelphi.edu/peoplematter/pdfs/chorney.pdf .
In this paper I try to establish that there is a lower limit to the rate of inflation below which one gets accelerating and chronic unemployment. It is the precise obverse of the natural rate of unemployment and I think it accurately describes what has happened in leading Western economies like
Canada and Germany and France which have suffered from higher unemployment but experienced very low inflation since their central banks switched to a tough variant of zero inflation monetarism in the late 1980s and early 1990s. It is also a useful concept because it allows one to appreciate and understand better the concept of the natural rate of unemployment which Milton Friedman introduced into the literature more than 30 years ago.In a way it completes the missing other half of the argument. I also believe that it has the potential to be quite useful in framing public policy guidelines.Just as we might agree that we should not push the unemployment rate so low that we had accelerating inflation we can also agree that we should not push the inflation rate so low that we have accelerating or chronic high unemployment.Like the natural rate of unemployment changing expectations play a role.
There are sufficient number of Keynesians in the population who expect higher unemployment whenever the central bank raises interest rates to tame inflationary expectations. This results in accelerating unemployment if the central bank drives unemployment beyond the natural rate of inflation:that rate of inflation below which there are accelerating expectations and rates of higher unemployment.
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