This has been pointed out by others, but I wanted to make a quick comment on Joe Gannon’s note on the Phillips Curve. Gannon suggests:

inflation is behaving exactly as the Phillips curve would predict. The decline in the US unemployment rate is too recent and too small to have caused any significant rise in inflation to date. Inflation is likely to pick up a bit next year, which supports the Fed’s tightening path, albeit with a considerable degree of uncertainty.

The true puzzle from the point of view of a simple Phillips curve model is the lack of much downward movement in inflation in 2010–14, when the economy was far below potential employment.[2] But this puzzle is easily explained by the fact that workers and firms strongly resist outright declines in wages and prices.

By my lights this is exactly correct. The key feature here is that I don’t expect inflation to respond to declining unemployment per se, I expect it to respond to tightness in the labor market. What that implies is that as long as unemployment is above its natural rate – for the sake of simplicity say 4% – we are still in a deflationary environment even if unemployment is falling. Gannon implies this formulation by his choice of axises on the two graphs he presents

At the bottom, he has not the change in the unemployment rate, but the unemployment gap. As long as unemployment is above the natural rate, the unemployment gap is positive.

A couple of additional points are worth noting. First, both the natural rate of unemployment and the natural rate of interest figure prominently in my mental model of the economy. Yet, I in no way mean to suggest or believe that these correspond to empirically measurable phenomena. They are ideal types that represent a Quine-esque locus of knowledge. Facts about local minimum wage rates, geographic mobility constraints, and the price of oil all enter into my subject since of what the natural rate of unemployment is. Likewise, the natural rate of interest carries with it implicit knowledge about the state of financial markets, the degree of flexibility in the capital structure, etc.

If we wanted to be overtly concrete about it, we could say that these represent first principle components of an array of labor and money market variables. However, I think muddier, more subjective talk gets at the essentials more readily.

Which brings me to my second point. I am not certain that there is any model, certainly not microfounded, that I know from which you can derive the mental model of monetary transmission that I have in my head. I think this is likely true for many economist-commentators. Paul Krugman is excellent at pulling out toy models to make a point, but precisely what makes him good at that is the awareness that none of these models actually fits the muddy model in his mind. Thus he selects freely to make the point at hand.