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What has happened to the Phillips curve?

Hopes that policymakers can engineer a soft landing rest heavily on the belief that wage growth can be tamed without a surge in unemployment. This ‘Phillips curve’ relationship has changed recently, with G7 pay growth now higher than it was before 2020 despite unemployment being only slightly lower. We suspect that pay growth can moderate without big job losses. But the risk is that mismatches wrought by the pandemic prove more persistent than we envisage and that expectations of sustained high inflation are becoming embedded in pay deals, requiring tighter policy and major layoffs to bring inflation to heel.

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