The Modified Philips Curve (Expectations Augmented)

 “Finding Philips, The American economy”, a 2017 article from The Economist, discussed the probability of the Philips Curve phenomenon appearing and giving economists a reliable prediction of where the unemployment rate and inflation will be in the future. Although the 2017 economy draws questions about the relevancy of the Philips Curve, the article noted pushback from economists who believe the Philips Curve is still useful in understanding the correlation of expected inflation and the unemployment rate. But an examination of expected inflation has found that it has created self-fulfilling prophecies and challenges the Fed’s ability to fulfill its inflation goals (2017).

A CNN 2022 news report seems to give a new life to the Philips Curve. The current 3.6% unemployment rate has dropped near the pre-pandemic rate of 3.5% while inflation and wages are rising higher (2022). The working inverse relationship between the two factors reassures Sal Guatieri, a senior economist at BMO noted in the CNN article, who calls this “great news for the economy” (2022). Having this predictive model allows the Fed, whose dual goal is “maximum sustainable employment” and “price stability”, to confidently craft a monetary policy to guide the economy (2020).

The difference between the 2017 economy and the 2022 economy that led to pendulum swings in economists’ belief in the Philips Curve seems to be the ability of the Fed to set inflation expectations. Kristie M. Engemann, writing for the Federal Reserve Bank of St. Louis, quoted the Fed chairman Jerome Powell, who explained that the Fed has isolated inflation from unemployment with its intentional targeting and set the public expectations of inflation (2020). Given the two case studies and Chairman Powell’s explanation, we can see that inflation expectations seem to be a crucial factor in whether inflation and the unemployment rate are correlated. The lynchpin in setting inflation expectations appears to be the Fed because when extraneous variables (i.e. the Ukraine-Russia war) happen, the public’s confidence in prices is shaken and the Philips Curve appears stronger.

Unemployment Rate and Inflation, FRED

Works Cited:

Engemann, M. Kristie. “What is the Philips Curve (and Why Has It Flattened)?” Federal Reserve Bank of St. Louis, 14 Jan. 2020. https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened. Accessed 11 Apr. 2022.

"Finding Phillips; The American economy." The Economist, vol. 423, no. 9045, 17 June 2017, p. 69(US). Gale Academic OneFile, link.gale.com/apps/doc/A495623706/AONE?u=taco36403&sid=bookmark-AONE&xid=7c10fc1d. Accessed 14 Apr. 2022.

Tappe, Anneken. "American added 431,000 jobs in March, bringing the unemployment rate to a new pandemic low" CNN, 1 April, 2022. https://www.cnn.com/2022/04/01/economy/us-march-jobs-report/index.html. Accessed 11 Apr. 2022.