Unemployment Rate vs CPI (Phillips Curve)
The Phillips Curve hypothesis: low unemployment leads to higher wages and then higher inflation; high unemployment cools both. The history is more complicated.
UNRATECPIAUCSL- Unemployment Rate
- CPI
A.W. Phillips's 1958 observation that wage growth fell when unemployment rose became the central trade-off taught in undergraduate macroeconomics. Policymakers in the 1960s used it as a menu: push unemployment lower at the cost of higher inflation, or vice versa.
The 1970s broke that. Both unemployment and inflation surged simultaneously — "stagflation" — and economists rebuilt the model around expectations. The modern view is that the Phillips Curve is a short-run relationship that holds when inflation expectations are anchored, and breaks when they aren't.
The 2010s recovery added a new wrinkle: unemployment fell to 50-year lows while inflation stayed below the Fed's 2% target. Many called the curve "flat" or "dead." Then 2021–22 brought it back — labor-market tightness coincided with the largest inflation surge since the early 1980s, and core inflation only cooled as wage growth slowed.
The lesson most economists draw: the curve still exists, but it's noisier than it was 60 years ago. Looking at unemployment and CPI year-over-year together shows when the relationship is operating and when other forces — energy shocks, supply chains, monetary regime shifts — dominate.
Frequently asked questions
Is the Phillips Curve still useful?
Most economists treat it as a short-run relationship that holds when inflation expectations are anchored, not a stable long-run trade-off. The Fed still uses Phillips-Curve-style reasoning when discussing labor-market tightness, but pairs it with explicit expectations management.
Why did unemployment and inflation both fall in the 2010s?
Globalization, technology-driven productivity gains, anchored inflation expectations, and energy disinflation all contributed. The labor market had slack that wasn't visible in the headline unemployment rate (broader measures like U-6 stayed elevated longer), which kept wage pressure muted.
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