Phillips Curve Calculator

The fundamental logic of the Phillips Curve rests on the idea that price inflation and unemployment move in opposite directions in the short run. The standard expectation-augmented Phillips curve equation is expressed as: Inflation = InflationExpectation - ConstantB * (Unemployment - UnemploymentNatural) + Shocks. Here, ConstantB represents the sensitivity of inflation to labor market slack, while the difference between current unemployment and the natural rate (NAIRU) dictates the cyclical pressure on price levels. In modern New Keynesian frameworks, inflation is also linked to the output gap through parameters like discount factors and price stickiness.

Consider an economy where the expected inflation rate is 2.5%, the natural rate of unemployment (UnemploymentNatural) is 4.5%, and the current unemployment rate is 3.5%. Suppose the sensitivity parameter ConstantB is 0.5, and there are no immediate supply shocks (Shocks = 0). Plugging these values into our equation: Inflation = 2.5 - 0.5 * (3.5 - 4.5). This simplifies to Inflation = 2.5 - 0.5 * (-1.0), which results in an expected inflation rate of 3.0%. This positive deviation occurs because tighter labor markets push price growth upward.

When modeling economic scenarios, always ensure your expectations for inflation are aligned with recent historical trends or central bank targets. Remember that supply shocks can temporarily shift the entire curve, causing simultaneous high inflation and unemployment, known as stagflation. Finally, distinguish clearly between short-run projections, where trade-offs exist, and long-run projections where the curve verticalizes at the natural rate of unemployment.