how nairu works
although there is no formula for calculating a nairu level the federal reserve has historically used statistical models and estimates that the nairu level is somewhere between 5 to 6 unemployment st louis fed estimates for 2005 2030 are between 4 and 5 3 nairu plays a role in the fed s dual mandate objectives of achieving maximum employment and price stability 1for example the fed typically targets an inflation rate of 2 as a medium term level to maintain 4 if prices rise too quickly due to a strong economy and it looks like the fed s inflation target will be exceeded by the inflation rate the fed will tighten monetary policy slowing down the economy and inflation 5understanding nairuaccording to nairu as unemployment rises over a few years inflation should decrease if the economy is performing poorly inflation tends to fall or subside since businesses can t increase prices due to the lack of consumer demand if demand for a product decreases the price of the product falls as fewer consumers want the product resulting in a cut in prices by the business to stimulate demand or buying interest in the product nairu is the level of unemployment that the economy has to rise to before prices begin falling conversely if unemployment falls below the nairu level the economy is doing well inflation should increase if the economy is performing well for many years companies can raise prices to match demand also the demand for products such as housing cars and consumer goods rises and that demand causes inflationary pressures nairu represents the lowest level of unemployment that can exist in an economy before inflation begins to rise 1think of nairu as the tipping point between unemployment and rising or falling prices 