Staff Working Paper No. 1,107
By Philip Bunn, Lena Anayi, Emily Barnes, Nicholas Bloom, Aaron Jalca, Paul Mizen, Gregory Thwaites and Ivan Yotzov
Macro evidence suggests a convex relationship between inflation and slack, but causal identification is challenging. Using large firm-panel surveys in the UK and US, we show that price responses to demand shocks are convex at the firm level, across hypothetical survey shocks, realised sales shocks, and Covid-induced demand shocks. Convexity is strongest when firms and industries face higher inflation, fades beyond two years, and applies to cost shocks. We rationalise these findings with a menu-cost model in which trend inflation moves firms closer to price-increase thresholds. We estimate that this non-linearity explains about one quarter of the 2022 inflation overshoot.
This version was updated in July 2026.
How curvy is the Phillips curve?
