Breakdown of the Phillips Curve (1970s)

For many years, economists believed there was a stable trade-off between inflation and unemployment, as shown by the Phillips curve.

According to this relationship, when unemployment was low, inflation tended to be high, and when unemployment was high, inflation tended to be low.

However, during the 1970s, this relationship broke down.

In 1973, a sharp rise in oil prices led to an increase in production costs across many industries.

As a result, prices rose across many goods and services, making everyday items more expensive for consumers.

Faced with higher production costs, firms cut production and reduced their workforce, which pushed unemployment up at the same time.

This simultaneous rise in inflation and unemployment, a condition called stagflation, contradicted the pattern predicted by the Phillips curve.

A few years later, in 1979, another sharp increase in oil prices caused similar problems.

The oil shocks showed that events such as a sudden spike in oil prices could make inflation and unemployment rise together, breaking down the idea behind the Phillips curve.