Phillips Curve Inflation Calculator
Estimate inflation using the Phillips curve trade-off between unemployment and price levels.
Enter expected inflation, NAIRU, sensitivity, and current unemployment rate.
The Phillips curve describes the short-run inverse relationship between unemployment and inflation. When unemployment falls below its natural rate, inflation rises. When unemployment is high, inflation falls.
The expectations-augmented Phillips curve (Friedman-Phelps, 1968):
pi = pi_e - beta x (u - u*)
where pi is actual inflation, pi_e is expected inflation, beta is the sensitivity of inflation to labor market slack, u is actual unemployment, and u* is the natural rate of unemployment (NAIRU).
How to read it. If unemployment equals NAIRU, actual inflation matches expected inflation. If unemployment is 2 percentage points below NAIRU, inflation runs above expectations by 2 x beta. Typical US estimates of beta are 0.3-0.5.
The long run. Friedman and Phelps showed the original Phillips tradeoff disappears in the long run. Workers and firms adjust their expectations. If policymakers keep unemployment permanently below NAIRU, inflation accelerates without bound. This is why central banks focus on keeping unemployment near the natural rate rather than minimizing it.
NAIRU estimates vary by country and time period. The US Congressional Budget Office estimates NAIRU around 4.0-4.5%. Europe’s structural unemployment is higher. Estimating NAIRU in real time is notoriously difficult, which is part of why monetary policy is so challenging.
The chart shows the short-run Phillips curve at fixed inflation expectations. Shifts in expected inflation shift the entire curve up or down.