Graph walkthrough · Macro · Phillips curve

An oil shock on the Phillips curve

Oil prices double.

Unemployment rateInflation rate0SRPCLRPCA₀

Step 1 of 3 · Before the shock

The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The economy sits at A₀, on both the short-run and the vertical long-run Phillips curve.

The chain in words

  1. Step 1

    Before the shock

    The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The economy sits at A₀, on both the short-run and the vertical long-run Phillips curve.

  2. Step 2

    The short-run Phillips curve shifts right

    Higher oil prices raise costs everywhere. Firms raise prices and cut jobs at the same time. At every unemployment rate, inflation is higher, so the short-run Phillips curve shifts right.

  3. Step 3

    A worse menu

    The economy now faces more inflation at every unemployment rate, and settles at A₁. If unemployment rises above the natural rate while inflation climbs, that is stagflation, which the old curve said was impossible.

Takeaway. An adverse supply shock shifts the short-run Phillips curve right, raising inflation and unemployment together.

Draw it yourself

This shock: draw the graphA demand boom hitsExpected inflation risesA credible disinflation

More on the phillips curve graph

A demand boom along the Phillips curveExpectations catch upA credible disinflationBetter job matching lowers the natural rate

Go deeper

Lesson: The Phillips Curve

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.
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