Has the Phillips Curve Become Steeper?

IMF Working Papers, May 12, 2023

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Examines whether structural changes after the pandemic have steepened Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation.
Uses granular price quote data for the UK and sectoral data from 24 advanced economies in Europe.
Authors: Anil Ari, Daniel Garcia-Macia, Shruti Mishra.
Date: May 12, 2023.

UK granular price quote analysis:
- Increased digitalization may have raised price flexibility.
- De-globalization may have made inflation more responsive to domestic economic conditions again.
Cross-country/sectoral evidence (24 advanced economies in Europe):
- Higher digitalization and lower trade intensity are associated with steeper Phillips curves.
Post-pandemic Phillips curve estimates:
- Indicate some steepening in the UK, Spain, Italy and the euro area as a whole.
- The magnitudes of steepening are too small to explain the entire surge in inflation in 2021–22, implying an important role for outward shifts in the Phillips curve.

Mechanisms identified:
- Digitalization → increased price flexibility (firms adjust prices more frequently or responsively).
- De-globalization → greater sensitivity of domestic inflation to domestic economic slack (stronger domestic link between output gap and inflation).
Policy-relevant implication:
- While modest steepening of Phillips curves may reduce the sacrifice ratio for disinflation somewhat, it does not fully account for the 2021–22 inflation surge; policy responses should consider both slope changes and possible outward shifts in the Phillips curve.