The unemployment rate everyone watches is not the one that predicts inflation

Economists have found that the usual unemployment rate does not predict future wage and price increases. Instead, a new measure, based on how many people are entering and leaving unemployment, shows when inflation will slow down. This means central banks might be looking at the wrong numbers when they decide to raise or lower interest rates.

For decades, central banks have used the unemployment rate to predict inflation. This paper shows that the number everyone watches is a lagging indicator. It turns out, the actual flow of people into and out of jobs is a better signal of future price changes. This could force central banks to rethink how they manage the economy, especially when deciding on interest rates.