Phillips Curve – definition

A Phillips Curve is a curve that shows the inverse relationship between unemployment, as a percentage, and the rate of change in prices. It is named after New Zealand economist AW Phillips (1914 – 1975) who derived the curve after analysing the statistical relationship between unemployment rates and wage inflation in the UK between 1861and 1957.

Phillips curve diagram

In this simple example, a reduction in unemployment from 3% to 2% would be consistent with a rise in the inflation rate from 2% to 6%. The Phillips Curve becomes steeper the nearer the unemployment rate approaches zero %.

The Phillips Curve has been influential in developing the mathematical models used by central banks and other forecasting organisations.