The Non-Accelerated Inflation Unemployment Rate (NAIRU) is the lowest unemployment rate that can occur in an economy before inflation starts to rise by a few inches.
with unemployment at the NAIRU level, inflation is stable; when unemployment rises, inflation falls; when unemployment falls, inflation rises.
Without an established formula for determining NAIRU, the Federal Reserve has historically used statistical models to set the NAIRU rate somewhere between 5% and 6% unemployment.
Estimating the NAIRU level against the backdrop of an investigation into inflation and unemployment helps the Federal Reserve reach its goal of both maximum employment and price stability.
On the other hand, NAIRU does not take into account many factors that affect unemployment, in addition to inflation; furthermore, the historical link between inflation and unemployment could break down, making NAIRU less effective.