Phillips Curve

Economics

The Phillips Curve theory holds that inflation and unemployment have an inverse relationship — lower unemployment typically produces higher inflation, and vice versa. Named after economist A.W. Phillips (1958). Used by central banks for decades to guide policy — accepting some inflation to reduce unemployment. The 1970s stagflation (high inflation + high unemployment simultaneously) discredited the simple Phillips Curve. Modern central banks consider expectations-augmented Phillips Curve, accounting for inflation expectations affecting actual inflation. The Fed monitors labor market tightness as one signal of inflation pressure but no longer follows mechanical Phillips Curve rules. Empirical relationships have become less reliable in recent decades.