INFLATION AND

PHILIP’S CURVE
Kathlyn Joy S. Vivero
Jheomari D. Yumul
INFLATION
Kathlyn Joy S. Vivero
Inflation

■ is a quantitative measure
of the rate at which the
average price level of a
basket of selected goods
and services in an
economy increases over a
period of time.
Two Causes of Inflation

■Demand-Pull Inflation
■Cost-Push Inflation
Demand-Pull Inflation

■ occurs when the overall demand for goods and services in an

economy increases more rapidly than the economy's production
capacity.
■ It creates a demand-supply gap with higher demand and lower supply,
which results in higher prices.
Cost-Push Inflation

■ Cost-push inflation is a result of the increase in the prices of

production process inputs.
THE PHILIPS CURVE
AND STAGFLATION
Jheomari Yumul
The Development of Philips Curve:
■ conceptualized by William
Phillips, a New Zealand born
economist.
■ Wrote a paper in 1958 entitled “The
Relation between Unemployment and
the Rate of Change of Money Wage
Rates” in United Kingdom.
■ He studied the wage of inflation
and unemployment in the
United Kingdom from 1861 to 1957
(96 years) which became a milestone
in the development of
macroeconomics.
The Phillips Curve Explained:
■ The Phillips Curve demonstrates that
there is an inverse relationship
between Inflation Rate and
Unemployment Rate.
■ The theory claims that with economic
growth comes inflation, which in turn
should lead to more jobs and less
unemployment.
■ Phillips conjectured that the lower the
unemployment rate, the tighter the
labor market and therefore the firms
must raise wages to attract scarce
labor.

Deriving the Phillips Curve Formula:

𝜋 = 𝐸𝜋 − 𝛽(𝑢 − 𝑢𝑛 ) + 𝑣
Inflation Expected Inflation Cyclical Unemployment Supply Shock
Phillips Curve vs Stagflation:

■ Phillips Curve was challenged by

other economists in 1970’s when
US had experienced Stagflation.
■ Stagflation occurs when an
economy experiences stagnant
economic growth, high
unemployment and high price
inflation.
Phillips Curve and Stagflation:
■ At the height of Phillips Curve’s popularity as a guide
to economic policy making, Milton Friedman a
well known monetary economist independently
challenged its theoretical underpinnings.
■ He argued that the government could not
permanently trade higher inflation for lower
unemployment.
■ He further developed a modified version of the
Phillips Curve and called it Expectations-Augmented
Phillips Curve.
Application: The Philippine Inflation Rate (2009 – 2018)
Source: Bangko Sentral ng Pilipinas: (bsp.gov.ph)

YEAR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Inflation Rate 4.2 3.8 4.7 3.1 2.6 3.6 0.7 1.3 2.9 5.2
Application: The Phillips Curve: Philippines (2009 – 2018)
Source: Bangko Sentral ng Pilipinas: (bsp.gov.ph)

YEAR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inflation Rate 4.2 3.8 4.7 3.1 2.6 3.6 0.7 1.3 2.9 5.2
Unemployment Rate 3.9 3.6 3.6 3.5 3.5 3.6 3.0 2.7 2.6 2.5
Trivia: Inflation Targeting Framework–
BSP’s guide in monetary policy making.
■ is an approach to monetary policy
that involves the use of a publicly
announced inflation target set by
the Government, which the BSP
commits to achieve over a two-year
horizon.
■ Promoting price stability is the
BSP's main priority, and the target
serves as a guide for the public's
expectations about future inflation,
allowing them to plan ahead with
greater certainty.
QUIZ TIME!

1-3. Define Inflation (3pts):

4-5. Identify the causes of Inflation (2pts):
6-10. Graph and dicuss the relationship between the
inflation rate and unemployment rate in the Phillips
Curve. (5pts)