Phillips curve

The Phillips curve describes a relationship between inflation and unemployment, traditionally associating lower unemployment with faster wage or price increases. Its shape and stability depend on expectations, supply shocks, and economic institutions.

Adaptive expectations: A model in which people form expectations by adjusting past expectations in light of recent outcomes. When inflation expectations adjust, the short-run curve shifts rather than preserving a permanent trade-off.
A. W. Phillips: A New Zealand economist whose 1958 study documented a relationship between unemployment and wage inflation in Britain. His historical data supplied the relationship that became known as the Phillips curve.
Monetary policy: Central-bank actions that influence money, credit, interest rates, and economic conditions. Policymakers use inflation and unemployment data to assess the costs of disinflation.
Long-run Phillips curve: A vertical relationship between inflation and unemployment at the natural rate in models with adaptive or rational expectations. It contrasts the short-run trade-off with the absence of a lasting long-run trade-off.
Anchored inflation expectations: A condition in which expected future inflation remains close to a central bank’s target despite short-term shocks. Anchored expectations may flatten the observed curve by limiting price responses to labor-market tightness.
Rational expectations: The hypothesis that people use available information and their understanding of economic processes when forming expectations. It challenges the idea that policymakers can repeatedly exploit a stable inflation–unemployment trade-off.
Phillips curve (1958): A. W. Phillips’s empirical study of unemployment and wage changes in the United Kingdom from 1861 to 1957. The original curve concerned wage inflation in Britain, not the modern price-inflation formulation.
Disinflation: A decline in the rate at which the general price level rises. The curve frames the possible employment costs of reducing inflation.
Short-run Phillips curve: A downward-sloping relationship between inflation and unemployment when expectations or prices adjust gradually. It isolates the temporary trade-off most commonly represented by the curve.
Wage-price spiral: A feedback process in which rising wages and prices reinforce one another over time. Whether tight labor markets trigger this feedback affects the curve’s slope.

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