The recent drop back in core inflation, even as the unemployment rate has fallen further, adds to the evidence that the Phillips curve has flattened. The reduced sensitivity of inflation to shifts in activity is usually attributed to globalisation, the anchoring of inflation expectations, the reduction in labour bargaining power and greater labour flexibility. The changing structure of the US economy has also played a role, however, particularly the expansion of heath care. Health care services prices now account for nearly 20% of the core PCE inflation measure but, since these are largely administrative prices set by the government rather than market forces, they do not react to the economic cycle.
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