βοΈ Phillips Curve Calculator
Tight labor markets push inflation up.
Inflation from the Phillips curve
Estimates for planning only, not financial advice.
The expectations-augmented Phillips curve says inflation equals expected inflation minus a sensitivity factor times the unemployment gap. With 2.5 percent expected inflation, a 0.5 slope, unemployment at 5.5 percent against a 4.5 natural rate, inflation comes out at 2.0 percent: the 1 point of slack drags half a point off inflation. Tight markets push the other way.
How to Use This Calculator
Enter expected inflation (surveys or market breakevens), the slope of the curve, actual unemployment, and the natural rate. The calculator returns the inflation rate the relationship implies and whether pressure runs upward or downward.
Enter expected inflation and the slope. A flatter slope (0.2 to 0.5) matches recent decades.
Enter actual and natural unemployment rates to set the gap.
Read implied inflation. For the natural rate input, our natural rate calculator builds it.
The Phillips Curve Formula
Friedman and Phelps added expectations in the late 1960s: workers and firms set wages and prices from expected inflation, so only surprise slack moves real outcomes. The original curve offered a permanent menu between inflation and unemployment; the augmented version says the menu shifts with expectations, and trying to hold unemployment below the natural rate just ratchets inflation up.
Worked Example
Expected inflation 2.5 percent, slope 0.5, unemployment 5.5 percent, natural rate 4.5 percent. The gap is 1 point of slack. Inflation = 2.5 - 0.5 x 1 = 2.0 percent. Flip it: unemployment at 3.5 percent (1 point tight) gives 2.5 + 0.5 = 3.0 percent inflation. Each point of tightness buys half a point of inflation at this slope.
Reading Your Result
The slope is the controversy. Estimates put it anywhere from 0.1 (very flat: slack barely moves inflation) to 1.0 (steep). The flat curve of the 2010s embarrassed forecasters who expected tight labor markets to ignite inflation; the post-2021 surge revived steeper views. Your answer is only as good as your slope.
My rule: expectations are the anchor and the risk. When expectations stay glued near target, the curve is forgiving and gaps matter little. When expectations drift, as in the 1970s, the whole curve shifts up and every gap costs more inflation. Central banks therefore guard expectations like a treasure: credibility is the cheapest disinflation ever invented. For the output gap behind the unemployment gap, our Okun's law calculator translates labor slack to GDP.
The curve's modern form adds expectations: inflation equals expected inflation minus the slope times the unemployment gap. This single addition explains the 1970s, when high unemployment coexisted with high inflation because expectations had detached. Central banks now manage expectations as carefully as rates, because anchored expectations near target are what make the short-run trade-off usable at all.
Supply shocks remain the blind spot. Oil embargoes, pandemics, and shipping chaos raise inflation regardless of unemployment, and no demand-side curve predicts them. Forecasters bolt supply variables onto the framework, but humility is warranted: the Phillips curve is a useful organizing lens, not a law of nature.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is the Phillips curve?
A relationship between unemployment and inflation: lower unemployment tends to come with higher inflation and vice versa. The expectations-augmented version says inflation equals expected inflation minus sensitivity times the unemployment gap. A.W. Phillips plotted UK wage data in 1958: the curve is named for him.
What is the formula?
Inflation = expected inflation - beta x (actual unemployment - natural rate). Beta is the slope: how much inflation moves per point of unemployment gap. With 2.5% expected, beta 0.5, and 1 point of slack, inflation is 2.0%. Plug in numbers: 2.5% expected, 0.5 slope, 1 point of slack gives 2.0% inflation.
Why did economists add expectations?
Because the original curve implied a permanent trade-off, which the 1970s stagflation refuted. Friedman and Phelps showed that only unexpected unemployment moves inflation; expected inflation shifts the whole curve. Sustained stimulus below the natural rate raises inflation without lasting job gains.
What is the slope of the Phillips curve?
Empirically debated: recent estimates often land between 0.1 and 0.5 (flat), meaning large unemployment moves nudge inflation modestly. Older estimates were steeper. The slope may itself vary with the inflation environment. The 1970s steepened it; the 2010s flattened it: regimes change the slope.
Does the Phillips curve still work?
In a weakened, flatter form. The 2010s showed tight labor markets with tame inflation; 2021 to 2023 showed the curve waking up. Most central banks still use Phillips-curve logic in forecasting, with humility about the slope. The Fed's framework review in 2020 was essentially a debate about this curve's slope.
What happens below the natural rate?
Wage pressure builds as employers compete for scarce workers, pushing inflation above expectations. The longer unemployment stays below, the more expectations adapt upward, shifting the curve and making the inflation persistent. Wage-price spirals are the nightmare: expectations detach and the curve shifts permanently.
Can supply shocks break the curve?
Yes. Oil spikes or supply chain chaos raise inflation even with high unemployment, as the 1970s and 2021 showed. The simple curve omits supply shocks; forecasters add them separately. Stagflation is the curve's blind spot. Central banks now model supply shocks explicitly: the 2021 lesson was expensive.
How do central banks use it?
To judge inflation pressure from labor market tightness and to calibrate rates. A negative unemployment gap (tight market) argues for tighter policy; a positive gap argues for ease. Expectations surveys get as much attention as the gap itself. The Fed watches the Survey of Professional Forecasters and TIPS breakevens most closely.
What are inflation expectations and how are they measured?
What people expect future inflation to be, measured via consumer surveys, professional forecaster surveys, and market breakeven rates from inflation-linked bonds. Anchored expectations near target are a central bank's most valuable asset. Unanchored expectations forced Volcker's brutal 1981 tightening: the cautionary tale.
Is there a long-run trade-off?
The mainstream view says no: in the long run the curve is vertical at the natural rate, so unemployment returns there regardless of inflation. The short-run trade-off exists but exploiting it persistently just raises inflation. Friedman and Phelps won Nobels arguing the long-run curve is vertical: the consensus held.