Those who followed the “soft landing” debate over the last few years will remember the cautious optimism of 2023: inflation was falling, unemployment wasn’t rising much, and for once the textbook trade-off between the two seemed to be behaving itself. Nicolas Petrosky-Nadeau, an economist at the Federal Reserve Bank of San Francisco, was one of the people who mapped that path in the first place, in a widely cited 2023 paper with coauthors Erin Crust and Kevin Lansing. In his latest Economic Note, he revisits the model he helped build — and finds that the ground has shifted under it.
He begins by reminding us what the original call was built on:
“In 2023, my coauthors and I sketched a path for a soft landing …A nonlinear Phillips curve, relating core inflation to the ratio of unemployed workers to job vacancies, was very steep when that ratio sat below 1.0. So a modest easing of a red-hot labor market, achieved mainly by shrinking job openings rather than raising unemployment, could bring inflation down without a recession. For a while, that is roughly what happened.”
The Phillips curve is the relationship between labour market slack and inflation. What made the 2023 version useful was its shape, steep at low levels of slack and flatter beyond it — meaning the Fed could cool an overheated market a little and get an outsized disinflation benefit, without pushing unemployment up much. But every forecast built on a stable relationship carries a hidden assumption, and Petrosky-Nadeau is upfront about what that assumption was here: inflation would fall back toward 2% “provided that the Phillips curve remains stable with well-anchored inflation expectations.” That “provided that” is doing a lot of work, and the note’s whole argument is about what happens when the proviso doesn’t hold.
What the recent data show is something very different from 2023:
“The recent readings no longer sit on that curve. The Figure updates the relationship with data through May 2026. From the March 2022 peak (red dot, unemployment-to-vacancy ratio near 0.5, core PCE inflation of 5.6%), the economy descended along the steep segment much as expected. But the points since January 2025 (gold) have settled at a ratio close to 1.0, a fairly normal degree of slack, while inflation has held near 3% and climbed to 3.4% by May 2026. The fitted 2023 curve (solid blue line) implies about 2.5% at that ratio. In other words, inflation is running roughly 0.9 percentage point above where the historical curve places it.”
Nearly a full percentage point of “unexplained” inflation is not a rounding error. It looks like something more structural:
“That gap is the signature of a curve moving outward…rather than the economy sliding along a fixed curve…Negative supply shocks, from tariffs to disruptions in energy markets, can produce exactly the pattern we see, lifting the inflation associated with any given level of slack.”
Under the heading “Why It Matters,” Petrosky-Nadeau spells out the stakes in his own words, and they’re worth quoting in full rather than summarising away:
“If the curve has shifted rather than the economy simply having stalled on the way down, the remaining distance to 2% is no longer a matter of a little more labor market cooling. It would require the curve to move back, or a significant slowing in demand.”
That is a meaningfully harder problem than the one the Fed thought it was solving in 2023. If the curve itself has shifted outward, no amount of comfortable, low-pain cooling gets inflation back to target on its own; either the supply shocks fade on their own, or the Fed has to force a genuinely more painful slowdown in demand.
Data through May 2026 suggests, in the US case, that the curve has moved. That suggests tighter monetary policy and higher interest rates from the Fed with obvious implications for the RBI.
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