What Shifts the Phillips Curve

The short-run Phillips curve shows a tradeoff: lower unemployment comes with higher inflation, for one given level of expected inflation. That curve only holds still as long as expectations, supply conditions, and the natural rate don't change. Shift any of those three, and the whole tradeoff relocates, so the same unemployment rate now comes with a different inflation rate than before.

A supply shock is the clearest case. Say oil prices spike. Firms face higher production costs at every level of output, so they raise prices regardless of how tight the labor market is. Inflation rises even if unemployment stays put, which pushes the entire short-run curve up and to the right. Workers and firms also revise their expected inflation upward in response, which can push the curve up again, a wage-price spiral. A falling natural rate of unemployment works differently: it shifts both the short-run and long-run Phillips curves left, since the long-run curve sits at the natural rate and the short-run curve is anchored to it.

Aggregate demand is the trap question here. A rise in AD lowers unemployment and raises inflation, which looks like it bent the tradeoff, but it only moved the economy along the curve that was already there. Nothing about the curve's position changed because expected inflation, supply costs, and the natural rate were untouched. This distinction matters going into money growth and inflation: sustained AD-driven inflation eventually raises expected inflation, and that expectation shift is what finally moves the curve itself.