Does the Phillips Curve Steepen When Costs Surge?

Simone Lenzu
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Simone Lenzu: https://resources.newyorkfed.org/research/economists/Lenzu

No 20260205, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Inflation does not always respond to cost and demand pressures in the same way. When shocks are small, the mapping from costs to prices is roughly proportional—double the shock, double the inflation response. But when the economy is hit by large shocks, this proportionality breaks down. As the recent surge and subsequent decline of global inflation showed, price growth can accelerate—or decelerate—by more than one-for-one relative to the size of the disturbance. Economists refer to this pattern as nonlinear inflation dynamics. In this post, I discuss what these nonlinearities mean, how they relate to the slope of the Phillips curve discussed in a companion post, and how firm-level data can help us understand the mechanisms behind them.

Keywords: price level; inflation; business fluctuations; Phillips curve (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2026-02-05
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DOI: 10.59576/lse.20260205

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