There is always a temporary tradeoff between unemployment and inflation; there is no permanent tradeoff. The temporary tradeoff comes not from inflation per se, but from unanticipated inflation, which generally means, from a rising rate of inflation.

~ Milton Friedman, The Role of Monetary Policy

We can discuss whether there is any sort of permanent trade-off later but for now lets look at the temporary one. The chart below is shows the percentage of small businesses raising or lowering prices. It comes from the NFIB Small Business Economic Trends Report.

One of these periods is not like the others. Can you spot it?


To be fair, the current period isn’t completely different from all the others. We can see mini-versions in 2002 and in 92. What did those periods have in common with today.


Sharp dives in the number of businesses raising prices is coincident with rising unemployment. In particular a large gap between what is really happening and what business say they are planning is also associated with increases in unemployment.


We can see a similar pattern in credit conditions. Though here credit changes lead changes in unemployment.


Interestingly,  there seems to be a decent correspondence between credit conditions and the level of unemployment, not just the change.

Here is the thing that really stays with me. All of this is survey data. We are asking people. People lie. People are biased. People don’t understand the question. All of these are inherently noisy indicators of what is going on, but they tell a consistent story: tight credit leads to higher unemployment and lower pricing power.

Where’s the mismatch?

I can’t resist pointing out that these charts also display optimism bias. Business always plan to raise prices more than they actually do. They also display nostalgia bias. Credit conditions were almost always better in the past than today. Yet, even with those common biases on display the trend story comes through.