The Misery Index, developed in the 1960s by Yale University economist Arthur Okun, has been a widely followed measure of national economic performance. The Index is calculated by simply adding together the trailing 12-month inflation rate and current unemployment rate. This week’s chart shows a nearly 70-year history of the Misery Index in the U.S.
The Misery Index rose in popularity (or maybe better stated unpopularity) during the Carter administration as stagflation reared its ugly head in the U.S. The Index peaked at nearly 22% in June 1980, as the annual inflation rate moved north of 14% and unemployment was 7.5%. The Index temporarily showed signs of life more recently following the financial crisis. A rapid doubling of the unemployment rate from 5% in April 2008 to 10% in October 2009 led the Index to move above 12% by the beginning of 2010.
However, the Misery Index has been in steady decline since 2010 as the unemployment rate has moved lower and inflation has consistently come in below the Federal Reserve’s (Fed) 2% target. The Index is now approaching its lowest reading in over 50 years as both inflation and unemployment appear headed lower for the second half of this year.
Key Takeaway:The current economic environment with both low unemployment and inflation flies in the face of one of the Federal Reserve's primary economic forecasting tools, the Philips Curve. The Philips Curve suggests wage inflation pressures (and inflation broadly) should pick up as the economy approaches full employment. Fed Chair Janet Yellen has stuck by Phillips Curve modeling but other Fed officials have started calling into question the relationship between low unemployment and higher inflation. St. Louis Federal Reserve President James Bullard recently suggested the Phillips Curve has never been a great forecasting tool. Will the Federal Open Market Committee (FOMC) tighten too rapidly for fear the Misery Index is just too good to be true? Or will the Fed be patient with additional rate hikes? I expect the Federal Reserve to shift away from rate hikes to a very gradual unwinding of its balance sheet and help sustain the trend toward less misery.
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