What is the role of inflation inertia in the Phillips Curve theory?

Inflation inertia refers to the tendency of inflation to persist at its current rate in the short run, even when there are changes in the level of unemployment. The role of inflation inertia in the Phillips Curve theory is to explain why there is a trade-off between inflation and unemployment in the short run.

According to the Phillips Curve theory, there is an inverse relationship between the rate of unemployment and the rate of inflation. When unemployment is low, there is upward pressure on wages and prices, leading to higher inflation. Conversely, when unemployment is high, there is downward pressure on wages and prices, leading to lower inflation.

However, the Phillips Curve theory also recognizes that inflation does not adjust immediately to changes in unemployment. Inflation inertia suggests that there are lags in the adjustment process, and it takes time for inflation to respond to changes in the level of unemployment.

In practical terms, this means that even if unemployment increases, it may take some time for inflation to decrease. Similarly, if unemployment decreases, it may take some time for inflation to increase. This is because wages and prices are sticky in the short run, meaning they do not adjust immediately to changes in economic conditions.

The presence of inflation inertia in the Phillips Curve theory implies that policymakers face a trade-off between inflation and unemployment in the short run. If they want to reduce unemployment, they may have to accept higher inflation in the short term. Conversely, if they want to reduce inflation, they may have to accept higher unemployment in the short term.

Overall, the role of inflation inertia in the Phillips Curve theory highlights the importance of considering the dynamics of inflation and the time it takes for the economy to adjust to changes in unemployment.