Phillips curve
An economic model showing the inverse relationship between inflation and unemployment — lower unemployment tends to cause higher inflation, and vice versa.
Example
“The Fed cited the Phillips curve when raising rates — low 3.5% unemployment suggested inflationary pressure ahead.”
Memory Tip
PHILLIPS CURVE = lower unemployment = higher inflation. The Fed's classic trade-off.
Why It Matters
Understanding the Phillips curve helps you anticipate how economic policy decisions might affect your purchasing power and job security. When central banks raise interest rates to combat inflation, unemployment may rise, which could impact your career prospects and wage growth, making it crucial to understand these economic tradeoffs.
Common Misconception
Many people believe the Phillips curve relationship is permanent and always predictable, but economists have found it weakens or shifts over time depending on inflation expectations and other factors. This means that historical patterns of inflation and unemployment do not always repeat exactly as expected in modern economies.
In Practice
In the 1960s, the US experienced a clear Phillips curve effect where unemployment fell from 6 percent to 3.5 percent while inflation rose from 1 percent to 5 percent. However, in the 1970s, the relationship broke down as both unemployment and inflation rose simultaneously, a phenomenon called stagflation, showing that the curve is not as stable as originally thought.
Etymology
Named after economist A.W. Phillips who identified the relationship in 1958.
Common Misspellings
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