There is instead an underlying variable explaining why a person both sleeps with their shoes on and wakes up with a headache. We should also be aware that when plotting two variables against each other, it is very rare to expect to find a clear-cut correlation of the type we see in textbook illustrations. The reason is, of course, that the variables are not just linked to each other but are also constantly influenced by a number of other factors. For example, inflation can be affected by changes in energy prices that do not have any significant impact on unemployment. Unemployment can, in turn, be affected by reforms on the labour market, for example, which do not have any significant effect on inflation, at least not immediately. In other words, we cannot expect to see an exact relationship but often have to be content with just barely being able to detect one. On the other hand, the absence of a correlation that is visible to the eye does not mean that there isn’t one. It may still be there and be detectable only if we control for variables other than just the two we are studying. To gain a better understanding of what happens behind the scenes, therefore, we often have to delve deeper into the data, consider more variables and use more sophisticated analytical methods than “eyeball econometrics”. But studying exactly what the data looks like is always a good starting-point. So let’s now look at the figures!
Inflation and unemployment  Inflation  Annual percentage change and as a share of the labour force 4  4  3  3  2018  2  2  2011  2007  1  0  1  5.5  6.0  6.5  7.0 7.5 Unemployment  8.0  8.5  9.0  0  Note. Moving averages over 12 months. Sources: Statistics Sweden and the Riksbank  As we see in Figure 3, there is a reasonably clear negative correlation during the whole period. The following additional observations can be made if we look a little closer: (i) (ii) (iii)  During the period 2015–2017, inflation rose while unemployment fell. Over the last six months, unemployment has fallen while inflation has remained on a level consistent with the inflation target. For a given level of unemployment, inflation has tended to be lower in recent years than it was during the period 2007–2010. As I noted, the original Phillips curve was formulated in terms of wage growth and not inflation. So what does such a curve look like for Sweden over the last decade? Seen over the entire period, the correlation also seems to be negative in Figure 4. But if we look at developments since 2011 in particular, there does not appear to be a correlation – The Phillips correlation seems to be more or less horizontal.