Definition
Phillips Curve
The Phillips curve describes an inverse short-run relationship between unemployment and inflation: lower unemployment tends to come with higher inflation, and vice versa.
The Phillips curve suggests policymakers face a trade-off: stimulating the economy to cut unemployment can push up wages and prices. Central banks like the RBI implicitly weigh this when balancing growth and inflation.
The relationship broke down in the 1970s with stagflation (high inflation and high unemployment together) and has flattened in recent decades. Modern central banks add inflation expectations to the model, and India's MPC watches both labour-market slack and expected inflation.
Related terms
- StagflationStagflation is the rare and painful combination of stagnant growth, high unemployment and high inflation occurring at the same time — a mix that leaves policymakers with no easy fix.
- NAIRUNAIRU is the non-accelerating inflation rate of unemployment, the jobless rate at which inflation stays stable; below it, inflation tends to rise.
- Output GapThe output gap is the difference between an economy's actual output and its potential (full-capacity) output, signalling whether it is overheating or underperforming.
- Okun's LawOkun's law is the empirical relationship that each percentage-point rise in unemployment above its natural rate is associated with a roughly 2% fall in real GDP below potential.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.