Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Phillips Curve

What it is:

The Phillips curve refers to the theory that unemployment rates relate inversely to inflation rates.

How it works (Example):

Proposed by British economist A. W. Phillips, the Phillips curve graphically expresses an inverse correlation between an economy's unemployment rate and inflation rate as shown below: 

Phillips posits that low levels of unemployment lead to higher prices. As more people become employed, wage levels increase. Broad increases in wages lead to higher demand for goods and services. This upward shift in demand results in higher prices (also called demand-pull inflation).

Why it Matters:

The Phillips curve comprises two economic variables which monetary policy-makers are responsible for maintaining at low levels: unemployment and inflation. The inverse nature of the Phillips curve shows that maintaining a low level in either one leads to a likely increase in the other. For this reason, monetary strategists and policy-makers need to strike an effective balance between inflation and unemployment.