16/05/2026
What is the Phillips Curve?
The Phillips Curve shows the relationship between inflation and unemployment in an economy.
It says-
> When unemployment is low, inflation tends to be high,
and when unemployment is high, inflation tends to be low.
So, it shows a trade-off - you can’t have both low inflation and low unemployment at the same time (at least in the short run).
Who introduced it?
It was introduced by A.W. Phillips, a British economist, in 1958.
He studied data from the UK and found this inverse relationship between unemployment rate and wage inflation.
Why is it important?
It helps governments and central banks understand policy trade-offs.
Policymakers can use it to decide between focusing on reducing inflation or reducing unemployment.
It also helps explain why too much spending or stimulus can cause rising inflation.
How to interpret the curve:
Downward sloping curve: means when unemployment falls, inflation rises.
Point on the curve: shows the current trade-off between inflation and unemployment.
Shift in the curve:
If people expect higher inflation, the whole curve can shift upward.
In the long run, this trade-off disappears economists like Milton Friedman argued that in the long run, the economy returns to its natural unemployment rate, no matter the inflation.
In short:
> The Phillips Curve shows that you can’t have it all - lowering unemployment often means accepting higher inflation, and vice versa.
