Phillips Curve- Germany

 

The Phillips Curve Model does not hold true in Germany, and uneployment levels do not have an inverse relationship with the rate of inflation. According to the Phillips Curve, when a country has high unemployment, there are lower levels of inflation as consumers are purchasing fewer items, and when unemployment is low, demand rises and there is a subsequent upward pressure on prices. This theoretically makes sense, but the relationship between Germany’s inflation and unemployment rates serve as proof that there is not always a perfectly inverse relationship. 

The Phillips curve is commonly criticized for its disregard of other inflationary factors and its broad assumption that economic growth always leads to an increase in inflation rates. Public spending, indirect taxes, genuine shortages and natural disasters or pandemics (ex. Covid) all lead to an increase in demand that ultimately exceeds supply, and inflation is not soley linked to unemployment. We can see the fallacies in this model when looking at stagflation and the instances where high inflation can be linked to periods of high unemployment. In Germany’s case, we can see stagflation occuring towards the end of the graph where instead of following a downward slope, as the Phillips Curve predicts, both data points are increasing (high unemployment and high inflation). The increase in both rates can be largely linked to both the pandemic and energy shortage from reliance on Russian oil and gas, roots of inflation and unemployment that aren’t addressed in the Phillips Curve model and have greatly influenced the country in recent years. All in all, while there is some truth to the graph, it does not accurately detail the many factors that influence both inflation and unemployment and therefore presents a false model of a perfectly inverse relationship. 

Sources- 

https://borgenproject.org/inflation-in-germany/#:~:text=Similar%20to%20many%20other%20countries,on%20Russian%20oil%20and%20gas.

https://data.worldbank.org/country/germany


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