Does the Phillips Curve Become Steeper During Periods of Rising Costs?

Understanding Nonlinear Inflation Dynamics

Inflation does not always react to changes in costs and demand in a straightforward manner. When disruptions are minor, there is a nearly direct relationship—if the shock doubles, inflation tends to double as well. However, this relationship falters when the economy experiences significant shocks. As seen in the recent global inflation spike and subsequent drop, price increases can outpace—or lag behind—the size of the initial shock. This phenomenon, known as nonlinear inflation dynamics, highlights that inflation can accelerate or slow down disproportionately in response to major disturbances.

This article explores the implications of these nonlinear patterns and examines their connection to the steepness of the Phillips curve during periods of substantial cost changes.