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The Phillips curve after the Great Recession

During the 1960s, some economists made the case that the Phillips curve—a negative relationship between the inflation rate and the unemployment rate—represented a tradeoff for policymakers. So, according to this view, a central bank could achieve permanently lower unemployment by accepting higher inflation. However, beginning with Milton Friedman in 1968, other economists made the case that the Phillips curve tradeoff was not permanent. According to this alternative view, the Phillips curve correlation might be observed in the data over some periods of time, depending on the types of shocks hitting the economy, but a central bank could not exploit a Phillips curve tradeoff to create permanently low unemployment. Then, beginning in the 1990s, New Keynesian economists propelled a resurgence of interest in the Phillips curve, which plays a prominent role in New Keynesian theory.

The graph shows the Phillips curve we observe in the data following the end of the Great Recession. The data run from June 2009 to August 2015, and the line connects the points in the scatter plot in temporal sequence running roughly from right to left in the graph. Over this period, the Phillips curve slopes the wrong way—a higher unemployment rate is associated with a higher inflation rate. Even if people may be waiting for a lower unemployment rate to produce higher inflation, this may never happen.

How this graph was created: Search the categories in FRED: Under the “Prices” heading, select “consumer price indexes” then “personal consumption expenditures: chain-type price index, monthly.” Set the sample as 2009-06-01 to 2015-08-01. Under the “Edit Data Series” option, change “Units” to “Percent Change from Year Ago.” This will yield a graph of the Fed’s chosen measure of the inflation rate over the post-recession period. Next, choose “Add Data Series” and search for and select “civilian unemployment rate, monthly, seasonally adjusted.” Now, edit this series by selecting the “Edit Data Series 2” option and setting the y-axis position to the left; select the “Graph Settings” option and set graph type to “Scatter.” Then choose “Edit Data Series 2” and set units to “Percent.” Finally, choose “Edit Data Series 1” and set line width to “1.”

Suggested by Steve Williamson.

View on FRED, series used in this post: PCEPI, UNRATE

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