The classical Phillips Curve suggested a stable, predictable trade-off between inflation and unemployment. Economists Milton Friedman and Edmund Phelps challenged this model by proving that inflation expectations alter this relationship over time.
The Accelerationist Pricing Formula
The expectations-augmented framework shows that short-term employment gains disappear once workers and corporations incorporate inflation into their long-term contracts. The plain-text mathematical formula is written as follows:
Inflation = Expected_Inflation - (Alpha * (Unemployment - NAIRU))

Where:
  • Inflation = The actual observed consumer price inflation rate.
  • Expected_Inflation = The pricing and wage inflation expectations held by the market.
  • Alpha = A parameter tracking how sensitive wages are to changing labor market tightness.
  • Unemployment = The current domestic unemployment rate.
  • NAIRU = The Non-Accelerating Inflation Rate of Unemployment (the structural unemployment floor).

If a central bank attempts to keep unemployment below the NAIRU threshold (Unemployment < NAIRU), inflation will continually outpace expectations. This dynamic forces market actors to raise their expectations curve, generating an upward Accelerationist Spiral that requires contractionary interest rate hikes to break.
 
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