Interactive Phillips Curve

Explore the short-run and long-run Phillips Curve. Drag the economy along the SRPC, shift inflation expectations, and model the monetarist expectations-augmented adjustment path.

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Current U

4.5%

Current π

1.56%

NRU

4.5%

U gap (U − NRU)

0.0pp

Expected π (SRPC₁)

6.0%

π at NRU

1.56%

SRPC₁

Expected inflation (π*)6.0%

Drag the amber point on the diagram to move along the curve.

SRPC₂

Curve shape

Curve steepness (k)0.30

Higher k → more convex curve. Reflects stronger trade-off at low unemployment.

U = 4.5%, π = 1.56%. Gap from NRU: 0.0pp.

The Phillips curve shows the relationship between the rate of unemployment and the rate of inflation. This tool draws a short-run Phillips curve (SRPC) for a given level of expected inflation and a vertical long-run Phillips curve (LRPC) at the natural rate of unemployment, so you can see why a trade-off that exists in the short run disappears once expectations adjust.

How to use this tool

On the SRPC tab, set “Expected inflation (π*)” to fix the height of SRPC₁, then drag the amber point along the curve to choose a combination of unemployment and inflation. The readout shows current unemployment, current inflation and the gap from the natural rate.
Switch SRPC₂ to “Shown” and set its expected inflation above or below SRPC₁ to represent a rise or fall in inflation expectations. The arrow between the two curves labels the direction of the shift.
On the LRPC tab, use “NRU (%)” to move the vertical LRPC, and turn on “Monetarist adjustment” to draw the path from the natural rate, along SRPC₁, up to SRPC₂ and back to the natural rate at a higher rate of inflation.
Use the Scenarios tab for preset positions — “Demand-pull boom”, “Stagflation (1970s)” and “Credible disinflation” — and “Curve steepness (k)” to change how sharply the SRPC bends.

What to notice

Moving along the SRPC shows the short-run trade-off: lower unemployment comes with higher inflation, because a tighter labour market pushes up wages and firms pass higher costs on as higher prices.
Each SRPC is drawn for one level of expected inflation. When workers come to expect higher inflation they bargain for higher money wages, so the whole SRPC shifts up.
The monetarist adjustment path shows why holding unemployment below the natural rate only works temporarily: once expectations catch up, unemployment returns to the natural rate but inflation is permanently higher.
The LRPC is vertical at the natural rate of unemployment. In the long run, demand-side policy changes the rate of inflation but not the level of unemployment.
The natural rate can only be lowered by supply-side measures that improve the labour market, such as better skills, faster job matching or greater occupational and geographical mobility. In the tool this is a leftward move of the LRPC.
A credible commitment to low inflation shifts the SRPC down, allowing inflation to fall without a long period of higher unemployment.

Using it in the exam

When you draw a Phillips curve, label the axes inflation rate (%) and unemployment rate (%), label each curve (SRPC₁, SRPC₂, LRPC) and mark the natural rate on the horizontal axis. Use the diagram to support a chain of analysis rather than replace it: expansionary demand-side policy reduces unemployment along SRPC₁, inflation rises, workers revise their expectations upwards, the SRPC shifts up and unemployment drifts back to the natural rate at a higher rate of inflation. Link the result to the question, for example as a conflict between low unemployment and price stability.

Evaluate: The stable short-run trade-off broke down in the 1970s, when stagflation brought high inflation and high unemployment together, and in some later periods low unemployment coexisted with low inflation. Supply shocks, globalisation, credible inflation targets and changes in labour market flexibility can all shift the relationship, and the natural rate cannot be observed directly, so policymakers can only estimate it. How useful the trade-off is depends on how expectations are formed and how credible the central bank is.

Revise the theory

Revise the theory behind this tool in our Edexcel revision notes:

Practise drawing the static versions you will need in the exam:

Frequently asked questions

What is the difference between the short-run and long-run Phillips curve?

The short-run Phillips curve slopes downwards and shows a trade-off between inflation and unemployment for a given level of expected inflation. The long-run Phillips curve is vertical at the natural rate of unemployment, because once expectations fully adjust to actual inflation, demand-side policy can only change the inflation rate, not the unemployment rate.

Why does the short-run Phillips curve shift?

The short-run Phillips curve shifts when expected inflation changes. If workers expect higher inflation, they bargain for higher money wages to protect their real wages, which raises firms’ costs and the inflation rate at every level of unemployment, so the curve shifts up. Lower, credible expectations shift it down. Supply shocks can also shift the curve.

What is the natural rate of unemployment?

The natural rate of unemployment is the rate that exists when the labour market is in equilibrium, made up of frictional and structural unemployment. At this rate there is no pressure for inflation to speed up or slow down. It can be lowered by supply-side policies that improve skills, information and labour mobility, but not by raising aggregate demand.