UC Berkeley

Tightening labor markets in the United States and other advanced economies suggest inflation should be on the rise, yet it remains subdued. Is the Phillips curve broken? We bring together surveys of household or firm expectations for 18 countries to estimate an expectations-augmented Phillips curve. We find strong evidence of a Phillips curve relationship: the Phillips curve is alive and well. The fact that inflation remains well below inflation expectations, both in the United States and abroad, suggests that there remains significant slack in labor markets.