Reports of the Phillips curve’s death are greatly exaggerated
Kortela, Tomi; Oinonen, Sami; Vilmi, Lauri (27.04.2018)
JulkaisusarjaBank of Finland. Bulletin
JulkaisijaBank of Finland
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-201805171556
Inflation has remained low in the euro area in recent years. This has raised doubts over the traditional view of inflation dynamics held before the financial crisis, where inflation is understood to be a function of inflation expectations and production costs. Alternative factors have been proposed to explain the low inflation rate, including the various effects of globalisation and digitisation. In our analysis, we demonstrate that the Phillips curve remains an effective tool for understanding inflation dynamics in the euro area. The recent period of low inflation can be attributed to sharp falls in the price of oil, subdued inflation expectations and a negative output gap. The development of inflation expectations remains central to predicting the path of inflation.