Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge

This paper reexamines the Phillips and Beveridge curves to explain the inflation surge in the U.S. during the 2020s. We argue that the pre-surge consensus regarding both curves requires substantial revision. We propose the Inverse-L (INV-L) New Keynesian Phillips Curve as a replacement for the standard New Keynesian Phillips Curve. The INV-L curve is piecewise-linear and more sensitive to labor market conditions when it crosses the Beveridge threshold -- a point at which the labor market becomes excessively tight and enters a "labor shortage" regime. We introduce a modified Beveridge curve that features a near-vertical slope once the Beveridge threshold is passed, suggesting that in this region, adjustment in labor market tightness occur almost exclusively through a drop in vacancies rather than an increase in unemployment. This feature matches the U.S. experience since the Federal Reserve's tightening cycle began in March 2022. We also observe a similar pattern in the data during five other inflation surges over the past 111 years where the Beveridge threshold was breached. We define a Beveridge-threshold (BT) unemployment rate. Once unemployment falls below this rate, policymakers need to be alert to sharp inflationary pressures arising from demand or supply shocks. We explore several policy implications.