Phillips curve

noun Phil·lips curve \ ¦filə̇ps- \
Updated on: 26 Jul 2017

Definition of Phillips curve

:a graphic representation of the relation between inflation and unemployment which indicates that as the rate of either increases the rate of the other declines

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Origin and Etymology of phillips curve

after A.W.H. Phillips †1975 British (New Zealand-born) economist


Financial Definition of PHILLIPS CURVE

Phillips curve

What It Is

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

How It Works

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.


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