The short-run Phillips curve describes an inverse relationship between inflation and unemployment, meaning lower unemployment often comes with higher inflation in the short term, and vice versa.
What’s Happening
The short-run Phillips curve shows a temporary trade-off between inflation and unemployment, where cutting unemployment can push inflation up due to stronger demand for goods and services.
This trade-off usually lasts less than two to three years because prices and wages haven’t fully caught up to new economic realities. Over time, as expectations settle, the trade-off fades and unemployment drifts back toward its natural rate regardless of inflation, as the IMF points out. Supply shocks—like oil prices suddenly jumping—can mess with this relationship by lifting costs while shrinking output at the same time. Geopolitical events that disrupt oil supply have shifted the curve’s position more than once in recent decades.
Step-by-Step Solution
To analyze the short-run Phillips curve, collect and plot recent inflation and unemployment data over a short window—say, the last 24 months.
Start by pulling seasonally adjusted monthly numbers from trusted sources such as the Bureau of Labor Statistics (BLS) for both the Consumer Price Index (CPI) and unemployment rates. Plot inflation (CPI year-over-year change) on the vertical axis and unemployment on the horizontal axis. Draw a best-fit line that slopes downward. A steeper slope, according to the Federal Reserve, signals a stronger inverse link. Mark the natural rate of unemployment (NRU)—often pegged near 4–5% in the U.S. as of 2026—where the short-run curve crosses the long-run vertical line. Use this setup to judge how current policies affect the economy or to project short-term trends.
