The Phillips Curve

What Is the Phillips Curve?

The Phillips Curve is a graphical representation of the inverse relationship between inflation and unemployment.

In its original form, it suggests that:

When unemployment is low, inflation tends to rise.

When unemployment is high, inflation tends to fall.

The idea is that tight labor markets drive up wages, which in turn push up prices — leading to inflation. Conversely, during periods of high unemployment, wage growth slows, reducing inflationary pressure.

So the curve suggests a trade-off: if you want lower unemployment, you might have to accept higher inflation — and vice versa.

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