Opinion: Reliance on the Phillips Curve Must Adapt With our Modern Economy

Recently, one of my wonderful economics professors at Fordham, who often shares interesting discussion topics and book suggestions, encouraged me to investigate a particularly relevant question: “in light of the U.S. economy's August 2025 4.3% unemployment rate, amid moderating inflation without a recession, to what extent does the Phillips Curve still hold as a reliable policy guide for the Federal Reserve, or has it been fundamentally altered by factors like AI-driven productivity gains, supply chain resilience, and anchored inflation expectations...potentially rendering traditional trade-offs between inflation and unemployment obsolete?”  

Since the 1990s, many economists, including Fed Chair Jerome Powell, have argued that the US economy “can sustain much lower unemployment than we thought without troubling levels of inflation,” challenging the concept of the Phillips Curve. The trade-offs and circumstances fundamental to the original curve are declining in relevance compared to modern drivers of economic output. However, recent, post-COVID steepening of the curve shows that, under certain circumstances, it can remain relevant in the short-run. By focusing on the factors included in my professor’s original question— anchored expectations, supply chain resilience, and AI-driven productivity— I believe that the stark contrast between their roles today and in the 1950s gives a strong explanation for its shifting pertinence as a long-run indicator.  

THE PHILLIPS CURVE  

Originating in the 50s, the Phillips Curve models the inverse relationship between employment rates and inflation. In theory, when unemployment rates are low, wages increase, aggregate demand increases, and companies raise their costs for consumers. This, in turn, leads to an increase in inflation. By the same principles, the same inverse relationship applies to high unemployment rates and low levels of inflation as prices and aggregate demand decline.   

Since the 50s, the relationship modeled by the curve has generally weakened, flattening to reflect steadily and simultaneously decreasing unemployment and inflation rates. However, post-COVID the US economy saw the curve shift upward and steepen. During and after periods of shock like COVID, production constraints limit output of goods, even as demand bounces back. The results are heightened inflationary pressures, supply chain bottlenecks, and sharp price increases; the Phillips Curve shifts so that inflation is higher than normal at any given level of unemployment.  

Knowing this, economists and policymakers should concentrate their applications of the Phillips Curve to short-term analysis, recognizing its strengths during periods of uncertainty and its limitations in predicting long term trends. However, the Fed continues to use the Phillips Curve to anticipate long-run inflation, guide monetary policies, and maximize sustainable levels of employment, despite its questionable reliability in this timeframe.  

ANCHORED INFLATION EXPECTATIONS  

Inflation expectations are a critical, foundational aspect of the Phillips Curve. Based on the model, low unemployment levels increase the expectation of higher demand, prices, and inflation— thus pushing real prices and inflation rates upward in a positive feedback loop. However, today’s expectations are much more anchored, meaning consumers don’t react as aggressively to changes in the unemployment rate. In a 2019 testimony before Congress, Powell explained that one of the main reasons for the decrease in the once-obvious relationship between unemployment and inflation is that “inflation expectations are so settled” among the public. 

Although inflation rates were low when the curve was introduced, significant events following it drove mass economic uncertainty. Particularly, “stagflation” in the 1970s resulted in high unemployment rates alongside high and growing prices, creating a simultaneous recessionary and inflationary period. This contributed to the public’s shaky and unanchored expectations, especially as the Fed’s “absolute faith” in the Phillips Curve was challenged.  

 Today, inflation expectations are far more anchored and stable, minimizing drastic price reactions to unemployment rates and keeping the feedback loop at bay. The Fed surveys show that consumers have more faith that inflationary periods will subside in reasonable amounts of time, and that rates will remain relatively stable over the next few years. In addition, the surveys indicated that consumers’ median inflation uncertainty declined for both the one- and three-year time horizons— illustrating strongly anchored expectations that, in turn, help keep changes to demand, prices, and actual inflation in check.  

SUPPLY CHAIN RESILIENCE 

Just as consumer expectations have changed significantly since the introduction of the Phillips Curve, supply chains have evolved tremendously. Based on the curve’s model, low unemployment rates drive demand, resulting in inadequate supply, higher prices, and increased inflation. However, this theory relies on the assumption that supply chains cannot react quickly enough to these sudden demand shifts. Data from the Fed’s Global Supply Chain Pressure Index (GSCPI) illustrates a strong correlation between supply chain pressures and inflation, especially through evident spikes in 2020 and 2021, post-COVID. Thus, increased focus towardS and modern improvements in supply chain resilience and adaptability can potentially help reduce the extreme inflationary reactions caused by sudden changes in employment. 

Our supply chains have become more and more globalized, creating more opportunities while also introducing the risks of large-scale economic disruptions, evident in the supply shocks and shortages experienced during the 2020 COVID-19 pandemic. However, the challenges helped fast-track improvements to widespread practices, contributing to a more resilient supply chains worldwide. The pandemic brought flaws in our supply chains to the surface— exposing the fragility of limited suppliers, data, logistics, and routes. Due to their interconnectedness, micro-level shocks yielded macro-scale effects around the world; demand for goods exceeded supply, and congested supply chain bottlenecks perpetuated shortages and drove up prices. Logistical inefficiencies like shipping delays and port closures contributed to record-high import prices for the US, exacerbating price hikes and inflationary pressures.  

Specifically, the pitfalls of long-time supply chain practices like just-in-time production and minimal input diversity strategies were exposed during COVID. For example, the “just in time,” or JIT, approach keeps excess inventory minimal to reduce costs, instead producing goods in response to real-time demand. JIT shows how the Phillips Curve was once a reliable prediction model: following a sudden drop in unemployment, a firm utilizing the JIT strategy is unable to adapt quickly enough to meet demand, thus raising prices for consumers and pushing inflation rates up.  

Similarly, in an effort to streamline operations, many firms had very few suppliers of inputs. Although simple and efficient in the production process, full reliance on only a few suppliers is extremely risky, as it fixes a firm’s input capacity and limits adaptability. Without alternative suppliers on hand and virtually inelastic supply, a sudden drop in unemployment and increase in demand puts a firm at risk of major input shortages, which can become detrimental to production during unpredictable events like COVID. As the Phillips Curve illustrates, prices and inflation therefore rise as a result of the unmet demand.   

However challenging the pandemic period was, it both fast-tracked the need for more resilient supply chains and gave new grounds for understanding and applications of the Phillips Curve. Diversifying suppliers and intermediaries in crucial US sectors became a major focus. According to one IMF analysis, “diversification— adding more locations and suppliers for sourcing—can reduce GDP losses from large shocks by more than half for countries in the Western Hemisphere, including the United States.” Government investments and legislation, like the Bipartisan Infrastructure Law, that promote both domestic and international supply chain diversification in critical sectors like health, energy, and agriculture, have undoubtedly increased adaptability and resilience. Prioritizing these improvements helps mitigate the risk of lengthy and severe supply shocks, lessening their impact on price hikes and inflation.  

Although positive, these improvements have rendered the Phillips Curve a less reliable model as a predictor of long-run inflationary responses to the demand shifts caused by fluctuating unemployment rates. Per the IMF, this increased resilience promotes the long-run flattening of the curve, reinforcing the need to adapt its use for short term applications.  

AI-DRIVEN PRODUCTIVITY GAINS 

With AI being nonexistent in the 1950s, economic productivity was more closely constrained by labor, productivity limits, and capital. A sudden decrease in unemployment meant increases in demand that could not be met quickly due to the overall lower capacity to produce output. This, of course, was followed by resulting price and inflation increases as modeled by the curve. 

Today, AI productivity continues to evolve alongside our economic landscape and the Phillips Curve. Although not yet dominant, AI has the potential to alter output ability, adaptability, and supply chain responsiveness. It has the potential to scale at greater speeds, optimize production, increase efficiency, and prevent wasted resources, and perform certain human tasks. However, future AI productivity remain speculation, and short term gains thus far have been limited.  

With the August unemployment rate at 4.3%, the traditional application of the Phillips Curve would predict a rise in inflation based on higher prices and unmet aggregate demand. However, recent factors, including the improvement of supply chain resilience and AI’s role in the modern economy, may help control the behavior of inflationary pressures. The long-run relationship between unemployment and inflation may continue flattening, encouraging its increased use for short-run analyses.  

CONCLUSION 

By comparing the original factors behind the Phillips Curve with the factors present today, it becomes clear that the model must be adapted to better reflect the behavior of our modern economy. The long-run, inverse relationship between unemployment rates and inflation modeled by the curve is no longer a given, evident in its flattening over time. Today, the supply, demand, and price reactions to unemployment that once triggered inflation changes are unlikely to occur in the same way or at the same scale. 

The combination of all three modern factors— anchored inflation expectations, supply chain resilience, and AI-driven productivity— are intertwined, reducing the impact of unemployment rates on inflation. In each case, the economy is newly equipped with avenues to adapt quickly and efficiently, and consumers are much less reactive as a result. With our increasingly complex and robust economy, I believe that the Phillips Curve is an oversimplification of the factors influencing inflationary pressures, especially in the long-run. Although inadequate as a sole model shaping long-run monetary policy, policymakers should leverage its ongoing strengths in the short-run, combining it with other indicators to develop a thoughtful, modernized approach to reaching economic goals.  

SOURCES  

"Employment Situation Summary." U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf. Accessed 10 Sep. 2025. 

"Global Supply Chain Pressure Index (GSCPI)." Federal Reserve Bank of New York, https://www.newyorkfed.org/research/policy/gscpi#/interactive. Accessed 10 Sep. 2025. 

"Inflation." Federal Reserve Bank of New York, www.newyorkfed.org/microeconomics/topics/inflation. Accessed 10 Sep. 2025. 

Kent, Julia. “Phillips Curve: Definition, History, and Limitations.” Investopedia, 29 July 2024, www.investopedia.com/terms/p/phillipscurve.asp. Accessed 10 Sep. 2025. 

de Soyres, François, et al. Supply Chains and Inflation. Bank for International Settlements, BIS Working Papers no. 1179, July 2024, www.bis.org/publ/work1179.htm. Accessed 10 Sep. 2025. 

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"Rethinking Your Supply Chain." Wharton Executive Education – Wharton at Work, Aug. 2021, executiveeducation.wharton.upenn.edu/thought-leadership/wharton-at-work/2021/08/rethinking-your-supply-chain/. Accessed 10 Sep. 2025. 

"What Are Inflation Expectations, and Why Do They Matter?" Brookings Institution, 14 Oct. 2022, www.brookings.edu/articles/what-are-inflation-expectations-why-do-they-matter/#:~:text=Inflation%20expectations%20are%20simply%20the,we%20expect%20it%20to%20be. Accessed 10 Sep. 2025. 

Wolla, Scott A., and Kaitlyn Frerking. “What Is the Phillips Curve (and Why Has It Flattened)?” Federal Reserve Bank of St. Louis Open Vault Blog, 6 Jan. 2020, www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened. Accessed 10 Sep. 2025. 

"Supply Chain Resilience." Council of Economic Advisers, Biden White House Archives, 30 Nov. 2023, bidenwhitehouse.archives.gov/cea/written-materials/2023/11/30/issue-brief-supply-chain-resilience/#:~:text=A%20growing%20economic%20literature%20shows,the%20health%20of%20supply%20chains. Accessed 10 Sep. 2025.