The absence of pricing leverage by firms, as a result of an absence of demand pressure, induces firms to work hard to restrain wage increases or to offset them with productivity gains. Let me sum up my interpretation of the recent unemployment and inflation experience.
Economic performance has truly been excellent over the past year with a particularly impressive combination of low core inflation and low unemployment in 1996. But this performance does not suggest that the business cycle is dead or that the Phillips Curve is no longer relevant. The decline in core inflation during 1996 most likely reflects the role of a coincidence of favorable supply shocks.