Revisiting a Post Keynesian Explanation of US Inflation

This paper presents an econometric analysis of inflation from a Post Keynesian perspective using quarterly data from 2002 to 2024 for the United States, including the most recent period of inflation after the onset of the COVID-19 pandemic. I evaluate the continued relevance of the comprehensive Post Keynesian model of inflation using a reduced form equation that incorporates both the aggregate demand–augmented wage-cost markup equation and the wage growth equation which is robust in explaining inflation. The robustness of the model is tested by incorporating different measures of labor market slack, wages, and inflation. The paper finds that the comprehensive model is not robust for the period 2002 to 2024 even when alternative measures for wages, unemployment, and inflation are utilized. This discrepancy arises because the negative relationship between unit labor costs and inflation, observed in the updated model, proved non-robust upon the inclusion of control variables for energy costs and imports. After employing the Prais–Winsten estimation to account for persistent serial correlation, the revised model aligned with the sign conventions of the original Atesoglu wage-cost markup equation. Specifically, while the coefficient for unit labor costs turned positive, it failed to reach statistical significance. Finally, I discuss potential factors for the decrease in the magnitude and significance of the coefficients in the aggregate demand–augmented wage–cost markup model for the period 2002 to 2024 as well as the pass through of wage growth to broader inflation measures.