Macro Foundations · advanced
What moves on the Phillips Curve diagram
Self-reinforcing wage and price setting raises expected inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. sharply, shifting the short-run Phillips curve well above its starting position.
InflationinflationA sustained rise in the overall price level, eroding money's purchasing power. has run above target long enough that people stop treating it as temporary.
Unions bargain for catch-up pay rises, firms pre-emptively raise prices to protect margins, and each round justifies the next.
Expected inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. ratchets up hard and the SRPC lifts sharply.
Once expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. un-anchor, returning to target costs a recession. That is why central banks fear this more than any single price shock.
Examiners ask this as: wage price spiral, expectations unanchored, indexation, second round effects, inflation psychology.
Other scenarios on Phillips Curve