Phillips Curve for UK’s Economy

Assignment 1 (Part A)
Group Number 4 Section I: Aakash (PGP38448) |Asmita (PGP38451) | Diksha
(PGP38475) | Deepak (PGP38452) | Mohit (PGP38443) | Sraban (ABM19055)

Introduction
Phillips Curve is the inverse relationship between the rate of inflation (CPI) and the
unemployment rate. This meant as the inflation rate increased, the rate of change of
unemployment decreased. We have used a scatter diagram and an estimated
equation to test this theory statistically and show that this relationship does exist for
the same time period of 1971-2021 in the United Kingdom. Using the scatter plot
graph, we show in the work how this relationship changes into the opposite
relationship between the inflation rate and the unemployment rate. This meant that
as the rate of inflation went up, the rate of unemployment went down during period
1971-2021.

The Short Run Phillips Curve

We have plotted the data on unemployment and inflation (CPI) in a graph for the
short-term using data from 1971 to 1990 (20 years), which we have taken into
consideration. In the scatter diagram, each dot stands for a year, and a curve was
made by fitting a line to the dots. We can see from the graph that there is a
significant inverse relationship between inflation and unemployment. We can see
that lower unemployment rates typically follow rising inflation rates.

Phillips Curve UK (1971-90)

30

25
Inflation Rate(CPI)

20

15
R² = 0.447602632684084
10

0
3 4 5 6 7 8 9 10 11 12 13
Unemployment Rate of 20 years

Figure 1: Short-Term Phillips Curve: Scatter diagram of the rate of Inflation (CPI) and the
unemployment rate for the period of 1971-1990 (20 Years)
The Long Run Phillips Curve
We have shown the data on unemployment and inflation (CPI) for the long-term
using data from 1971 to 2021 (50 years). In the scatter diagram, each dot stands for a
year, and a curve was made by fitting a line to the dots. Figure 2 demonstrates that
the curve has practically flattened down, indicating that the long-term correlation
between unemployment and inflation is not particularly strong which is true for the
long-term Phillips Curve. The chart shows that the rate of change in inflation (CPI) is
almost zero at a level of unemployment between 10% and 12%, indicating that there
are no changes in inflation (CPI) rates at this level of unemployment.
The correlation between the unemployment rate and the inflation rate is quite low,
as seen by the R2 value of 0.0079 for the curve below.

Phillips Curve UK (1971-21)

30

25
Inflation Rate(CPI)

20

15

10

5 R² = 0.00788992723890425

0
3 4 5 6 7 8 9 10 11 12 13
Unemployment Rate of 50 Years

Figure 2: Long-Term Phillips Curve: Scatter diagram of the rate of Inflation (CPI) and the
unemployment rate for the period of 1971-2021 (50 Years)

References:
1) https://en.wikipedia.org/wiki/Phillips_curve
2)https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?
end=2021&locations=GB&start=1964
3) https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=GB
4) https://fred.stlouisfed.org/tags/series?t=cpi%3Bunited+kingdom
 Augmented Phillips Curve for UK’s Economy
Assignment 1 (Part B)
Group Number 4 Section I: Aakash (PGP38448) |Asmita (PGP38452) | Diksha
(PGP38475) | Deepak (PGP38452) | Mohit (PGP38443) | Sraban (ABM19055)

Introduction
The expectations-augmented Phillips curve assumes that if actual inflation rises,
expected inflation will also increase, and the Phillips curve will move upwards so as
to give the same expected real wage increase at each employment level. Under this
model, there is no long-run trade-off between unemployment and inflation. To
achieve an unemployment rate below the non-accelerating inflation rate of
unemployment would involve an ever-increasing rate of inflation. This is thought to
be undesirable since while moderate rates of inflation may do relatively little harm,
hyperinflation seriously interferes with the efficient running of the real economy by
impairing the economic functions of money.

Augmented Phillips Curve UK (1981-21)

3
2
1
0 f(x)==0.177109254039298
R² − 0.287035525580996 x + 1.70750934318485
Inflation Rate(CPI)

3 4 5 6 7 8 9 10 11 12 13
-1
-2
-3
-4
-5
-6
-7

Unemployment Rate(πt - πte )

Figure 3: Long-Term Augmented Phillips Curve: Scatter diagram of the rate of Inflation (CPI) and
the unemployment rate (πt - πte) for the period of 1981-2021 (40 Years)

An inverse linear regression between the two variables can be depicted in the
diagram. But to confirm the significance of the relation between the two variables
we have also calculated the equation between them.
The output of the regression of this equation: is y = -0.2324x + 1.440 with an R-
square value of 0.1660.
The beta for the augmented curve is -0.2324 so it’s indicating an inverse relationship
due to the negative sign which means for a 1 unit increase in the unemployment
rate, the inflation rate will decrease by 0.2324.
With the help of regression analysis of Unemployment and Inflation data from 1981-
2021, the p-value has come out to be 0.03 which is less than 0.05.
Therefore, we accept the null hypothesis i.e. H0: Significant Inverse relationship
between Unemployment and Inflation.

Figure 4: Regression Summary Output for Scatter Plot of Unemployment rate and Inflation Rate
1981-2021(40 Years)

Conclusion: After analysing the augmented Phillips curve, it has been found that the
relationship between Change in Inflation and Unemployment in the United Kingdom
(1981-2021) does have a statistically significant inverse relationship.

References:
1) https://en.wikipedia.org/wiki/Phillips_curve
2)https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?
end=2021&locations=GB&start=1964
3) https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=GB
4) https://fred.stlouisfed.org/tags/series?t=cpi%3Bunited+kingdom