Definition
Phillips Curve Flattening
Phillips curve flattening describes the weakening of the historical inverse link between unemployment and inflation, where low joblessness no longer reliably pushes inflation up.
In recent decades, falling unemployment in many economies produced surprisingly little inflation, suggesting the Phillips curve flattened. Globalisation, anchored inflation expectations and technology are cited causes.
A flat Phillips curve complicates central banking: policymakers can let employment run higher without immediate inflation, but it also means inflation, once unleashed (as post-pandemic), is harder to read from labour-market slack alone. The RBI weighs this when interpreting India's growth-inflation mix.
Related terms
- Phillips CurveThe Phillips curve describes an inverse short-run relationship between unemployment and inflation: lower unemployment tends to come with higher inflation, and vice versa.
- 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.
- InflationInflation is the rate at which the general level of prices rises over time, steadily eroding the purchasing power of money and the real value of savings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.