Reference wage values, social preferences, jobs’ characteristics, skills’ endowments and even Central Banks’ targets, they all change over time – hence, the impact of cumulative wage gaps on inflation cannot be the same in different time periods. In fact, even Phillips (1958) mentioned that he ignored years in which import prices rise rapidly enough to initiate a wage-price spiral. He stated that his hypothesis that the rate of change of money wage rates can be explained by the level of unemployment is supported except in or immediately after such years. In doing that, he effectively acknowledged the non-stationarity of his curve. He referred to those years as events that occur very rarely except as a result of a war. Our approach embraces these events, except that in modern times it is not war that makes the difference, but recessions; and recessions happen more often than wars. We try to explain what happens during and after recessions – which is exactly what is omitted by the original Phillips curve. Wages, as the most important source of income for most households around the globe, stand at the basis of any consumption theory. The main problem with the prevailing consumption theories (Keynes’ consumption function (1936), Modigliani’s life-cycle hypothesis (1966) and 2  Friedman’s permanent income hypothesis (1957)) is their long-term approach. This puts them at odds with our rather short and medium-term perspective on inflation, especially in times of crisis.
For Phillips Curve to work, the loss of welfare from a negative cumulative real wage gap has to be fully compensated first – as a stock measure, not as a flow. The policy implication from this finding is that, for those countries which have not closed their cumulative real wage gap (most of the developed economies), inflation will remain subdued until they close their cumulative wage gap. Distinguished guests, I would like to thank the organizers, Central Banking, for inviting me to speak about a very topical issue: subdued inflation. Inflation has been subdued in the post-crisis years, and the Phillips Curve has failed to explain it. It is probably the greatest mystery of the economic science in the last decade: where has the Phillips Curve gone? There are multiple references to the fact that the Phillips Curve has flattened over the last decade, if not earlier (to mention just a few: Forder (2014), Leduc and Wilson (2017), Borio (2017), Carney (2017), Cunliffe (2017), Praet (2016, 2018), Spencer (2017), Murphy (2018), Bullard (2018)). The flattened Phillips Curve and the lesser link between inflation and unemployment, inflation and output gaps, or inflation and wages, have multiple explanations.