Inflation Dynamics and Digitalization

This paper examines how digitalization reshapes inflation dynamics by conditioning the slope and persistence of the Phillips Curve within a New Keynesian framework. Using U.S. quarterly data from 1990Q1 to 2024Q4, the study estimates backward-looking, forward-looking, and hybrid New Keynesian Phillips Curves via Generalized Method of Moments, embedding digital intensity as a structural modifier of the inflation–slack transmission mechanism. The results show that U.S. inflation dynamics are best characterized by a hybrid Phillips Curve in which forward-looking expectations dominate but inflation persistence remains non-negligible. While the inflation response to real activity is modest when slack is measured by the output gap, it becomes substantially stronger when proxied by real marginal costs. Crucially, digitalization significantly weakens the pass-through from both output gaps and marginal costs to inflation, flattening the Phillips slope as digital intensity rises, while leaving the forward-looking component largely intact. These findings suggest that digitalization does not eliminate the Phillips Curve but transforms its transmission channel, offering a structural explanation for the coexistence of subdued inflation responsiveness and expectation-driven pricing in the digital era.