Supply-Driven Inflation: Anchored Expectations and Optimal Macroeconomic Policy Response

Asad Ejaz Butt

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: This paper investigates why U.S. inflation during 2021–2022 subsided without the expected rise in unemployment implied by the Phillips curve, advancing the question of whether supply-side factors and anchored expectations reshaped the inflation–employment relationship. Drawing on macroeconomic data from FRED, the study integrates empirical analysis of inflation, wage growth, energy prices, and unemployment to test the sensitivity of inflation to labor market conditions. The theoretical framework re-evaluates the Phillips curve in the context of supply-driven inflation and credible inflation-targeting regimes. Results indicate that supply shocks—mainly energy price and supply-chain disruptions—proved transitory, while the Federal Reserve’s communication effectively anchored expectations near its 2% target. Consequently, inflation declined without the employment sacrifices predicted by traditional models, implying a flatter Phillips curve and stronger role for expectations anchoring. The study concludes that macroeconomic policy must better distinguish supply- from demand-induced inflation, integrating expectations management and policy credibility into models of disinflation dynamics.

Keywords: Supply-driven inflation; Phillips curve; Anchored expectations; Disinflation; Monetary policy credibility; Supply-side shocks; Inflation targeting; Energy prices; Labour market dynamics; Macroeconomic stabilization (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:333975

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