Monetary policy decisions are built on macroeconomic relationships. Central bank research teams monitor these indicators continuously to calibrate their policy interest rates.

The classical Phillips Curve suggested a predictable trade-off between inflation and unemployment. Central bankers could choose to support employment if they were willing to tolerate slightly higher inflation.

[Unemployment Drops] ---> [Labor Markets Tighten] ---> [Wages Rise] ---> [Inflation Spikes]

Modern central banking relies on the Expectations-Augmented Phillips Curve and the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This framework states that if unemployment drops below the NAIRU threshold, inflation expectations can shift upward, forcing the central bank to execute aggressive interest rate hikes to anchor inflation expectations.