Broken Phillips Curve a Symptom of Lower U.S. Inflation Expectations

Is the Phillips curve breaking down? Tight labor markets have historically tended to place upward pressure on wages and inflation. And the Phillips curve, a theory embodying the inverse relationship between inflation and unemployment, has been the cornerstone of modern monetary policy.

Yet U.S. CPI and wage inflation remain modest today, despite a nearly eight-year U.S. economic expansion and an unemployment rate that has already dropped below the Federal Reserve’s estimated “natural rate of unemployment” (the “equilibrium” long-run level of unemployment, o en used interchangeably with the “non-accelerating inflation rate of unemployment,” or NAIRU). is casts doubt on the importance of labor market slack as a driver of inflation.