The Phillips curve illustrates the relation between the output gap and the inflation rate. Put simply, it shows that when the economy is strengthening with the labor market as well as the goods and services markets being tightened, prices tend to increase. In the Phillips curve, the vertical axis depicts the inflation rate and the horizontal axis depicts the output gap.
It is assumed that the relation of the two is an upward-sloping curve, that is, when the economy recovers and the output gap moves to the right, the inflation rate moves upward accordingly. Let us look at the change in the Phillips curve for Japan over the past 15 years.