Inertial inflation and Phillips curve

ABSTRACT

This note introduces the problem of indexation of wages, exchange rate, and other prices in the Phillips’ curve. With this aim, we developed a simplified model of the inflationary process decomposing it in (1) inertial inflation; (2) the Phillips’ curve; (3) administered or supply shock inflation. Using this model, first we show that a supply shock shifts the Phillips’ curve accelerating the trend rate of inertial inflation. Second, that a continuous demand pressure through Phillips’ curve leads to continuous acceleration of the rate of inflation. And third, that a rise in the rate of unemployment may lead to an oligopolistic increase in the profit margin, which also leads a shift in the Phillips’ curve and an acceleration of inflation.

KEYWORDS:
Inflation; Phillips curve