Definition
NAIRU
NAIRU is the non-accelerating inflation rate of unemployment, the jobless rate at which inflation stays stable; below it, inflation tends to rise.
The NAIRU is the unemployment level consistent with steady inflation. If joblessness falls below NAIRU, the economy overheats and inflation accelerates; above it, inflation eases. It is the modern, vertical-long-run version of the Phillips curve.
NAIRU is unobservable and shifts with productivity, demographics and labour-market structure, making it hard for central banks to pin down. The RBI considers labour-market slack alongside other indicators when judging how much the economy can grow before inflation flares.
Related terms
- Phillips CurveThe Phillips curve describes an inverse short-run relationship between unemployment and inflation: lower unemployment tends to come with higher inflation, and vice versa.
- Output GapThe output gap is the difference between an economy's actual output and its potential (full-capacity) output, signalling whether it is overheating or underperforming.
- Okun's LawOkun's law is the empirical relationship that each percentage-point rise in unemployment above its natural rate is associated with a roughly 2% fall in real GDP below potential.
- InflationInflation is the rate at which the general level of prices rises over time, steadily eroding the purchasing power of money and the real value of savings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.