Deconstructing Modern Inflation
Global inflation in the post-pandemic era has forced a reevaluation of traditional macroeconomic models. Inflation can no longer be viewed strictly as a monetary phenomenon; it is heavily influenced by structural supply-side shocks and deglobalization.
The Phillips Curve Flattening and Steepening
The Phillips curve represents the inverse relationship between unemployment and inflation:
$$ \pi_t = \pi_t^e – \beta (u_t – u_n) + \nu_t $$
Where $\pi_t$ is inflation, $\pi_t^e$ is expected inflation, $u_t$ is unemployment, $u_n$ is the natural rate of unemployment (NAIRU), and $\nu_t$ represents supply shocks. For decades, $\beta$ (the slope) was exceptionally flat. However, tight labor markets and structural shifts have caused a steepening of the curve, meaning slight decreases in unemployment now trigger outsized inflationary pressures.