Macroeconomics: Inflation and Unemployment Analysis

This study analyzes the relationship between inflation and unemployment in Republic of Ireland, Germany, and United Kingdom. It examines the consumer price index and unemployment rate data from 1990 to 2019 to understand the changes in these variables over time. The study also discusses the concept of the Philip curve and its relevance to the economies under study.

MACROECONOMICS

INTRODUCTION
Macroeconomics is considered to be one of the branch of economics which studies various
economics factors as a whole. Such economic factor refers to the unemployment rate, growth
rate, GDP and inflation. The changes in the economy are taken as an aggregate. The present
study is based on inflation in terms of consumer price index and unemployment as a factor of
economy. These factors are studied for three countries, that is Republic of Ireland, Germany and
United Kingdom. The data for the period beginning from 1990 to 2019 will be studied to
describe the changes taken place in two variables, that is CPI and Unemployment rate in these
three countries over the period concerned.
MAIN BODY
Consumer Price index or CPI: It is the indexing or averaging of prices of basket of
predetermined goods and services. The calculation of such index is done on the basis of taking
into consideration the changes occurred in it and then finding out their weighted average. The
changes in the economic purchasing power can be derived through this index (Chen and Hu,
2018). The rise in this index shows that there is an inflation in the economy, due to the increase
in price of goods and services that form part of the basket.
Inflation rate has been calculated with reference to the corresponding change in the consumer
price index. In this report many times this rate becomes zero or goes below zero, that is negative
inflation rate which indicates the deflation in the economy.
Unemployment rate: It indicates the percentage of population who are willing to work but are
not getting any work due to the incapability of an economy to generate sufficient employment
for them, so that the labor supply match with the demand for labor. The rising rate of
unemployment shows that there is underutilization of supply of labor in the economy. The cause
of higher unemployment can be majorly due to the economic shocks like recession and financial
crisis.
Philip curve concept: It is the economic concept or theory stating that there is an inverse
relationship between two major economic variables, that is unemployment and inflation. The
concept has been introduced by A.W. Philips who believes that with the growth and development
of economy, there exists higher demand for goods and services which causes inflation and leads
to encouragement among producers to produce more at higher prices. This more production leads
to demand for more labor force creating more jobs and reducing unemployment in the economy.
Consumer Price Index and Inflation rate of Republic of Ireland
Year Index Unemployment rate Inflation Rate
2021 102.3 7.0 2.3
2020 101.3 7.4 1.3
2019 101.7 5.0 1.7
2018 100.8 5.8 0.8
2017 100.1 6.7 0.1
2016 99.8 8.4 -0.2
2015 100.0 10.0 0

2014 100.0 11.9 0
2013 99.7 13.8 -0.3
2012 99.2 15.5 -0.8
2011 97.4 15.4 -2.6
2010 96.2 14.6 -3.8
2009 97.8 12.6 -2.2
2008 99.5 6.8 -0.5
2007 96.4 5.0 -3.6
2006 93.7 4.8 -6.3
2005 91.3 4.6 -8.7
2004 89.3 4.7 -10.7
2003 87.3 4.8 -12.7
2002 84.0 4.7 -16
2001 80.2 4.2 -19.8
2000 77.1 4.5 -22.9
1995 67.7 12.1 -32.3
1994 65.8 14.2
1993 0 15.5
1992 0 15.4
1991 0 14.7
1990 0 13.4
Graph showing consumer price index or inflation rates and Unemployment rates for the period
from 1990-2021

Description: The above chart and table are indicating information pertaining to Irish Consumer
Price Index inflation and Unemployment rate relationship for period of 30 years. It is a period
beginning from 1990-2019 which involves three Monetary policy regimes in force since the state
has been founded, that is, European Monetary System and Economic and Monetary Union.
Under this period the Irish economy has been transformed from agricultural to advanced
economy. The relationship between two variables, that is, unemployment and inflation rate
largely considered to be the outcome of shocks faced by the economy (Shaari, and et. al., 2018).
It has been clearly indicated in the above chart and table, that there exists inverse relationship
between inflation and unemployment rates, where inflation is continuously increasing from last
thirty years while unemployment has been reduced to a great extent. The existence of inverse
relationship in these two variables ensures that the Philip curve concept holds true for Irish
economy. The theory of Philip curve states that when the economy of any country follows the
path of economic growth, then with this growth, there seems rising inflation where producers
want to produce more which results in higher demand for employment, and ultimately leads to
lower rate of unemployment in the economy. Again, with the rise in aggregate demand, there is a
rise in inflation and reduction in unemployment causing negative relationship. This concept has
been clearly reflected in the above data which has been the result of economic growth in
Republic of Ireland in terms of sectoral transformation (Ho and Iyke, 2019). Unemployment in
Irish economy was of major concern from last many decades. It has been explained that
unemployment is decreasing against the rising inflation. But the actuality is quite different which
reflects that due large supply of labor against its demand and concentration of much population
in low level of education, there is an existence of high unemployment. Another cause of
unemployment in Ireland was its male dominating nature of employment, where previously only
males are considered to be the potential labor force, now with the overall economic development,
females are also becoming potential and accordingly demanding employment, thus leads to
increase in unemployment due to corresponding constancy in jobs.
By analyzing the data for the period from 1990-2019, where consistent rise in inflation
has been indicated, there are many causes for such increments. The economic growth of Ireland
is the major cause among others. The negative rate of inflation or deflation in the economy has
turned out to the high rate of inflation within the duration of approximately 30 years. the positive
side of such increasing inflation has been indicated just beside it, where the unemployment in
comparison to inflation has decreased over the time. A clear indication of financial crisis has
been made which occurs between the period of 2008 and 2011 . During this period, the concept
of Philip curve also gets reversed as is seen in the information provided above, where for this
particular period inflation get halted causing deflation and unemployment began to rise
(Grönlund, 2017). The financial crisis in Ireland was characterized by the sudden or drastic
economic turn which transformed the economy from booming situation to recessionary crisis.
The economy was experiencing salaries and job cutting which resulted in unemployment . The
reason of sudden economic downfall was due to the collapse of property sector which was
resulted from poor management of risk in Irish banking sector along with the inefficiency of
financial regular to supervise the same.
Consumer Price Index and Inflation rate of Germany

Year Consumer Price
Index
Unemployment
Rate
Inflation rate

2021 107.3 3.5 7.3
2020 105.8 4.0 5.8
2019 105.5 3.2 5.5
2018 104.0 3.4 4
2017 102.1 3.8 2.1
2016 100.4 4.1 0.4
2015 100.0 4.6 0
2014 99.3 5.0 -0.7
2013 98.6 5.2 -1.4
2012 97.0 5.4 -3
2011 95.0 5.8 -5
2010 92.7 7.0 -7.3
2009 91.6 7.8 -8.4
2008 91.4 7.5 -8.6
2007 89.0 8.7 -11
2006 87.0 10.3 -13
2005 85.5 11.2 -14.5
2004 83.8 10.9 -16.2
2003 82.4 9.9 -17.6
2002 81.5 8.8 -18.5
2001 80.4 8.0 -19.6
2000 78.9 7.9 -21.1
1999 77.8 8.7 -22.2
1998 77.3 9.6 -22.7
1997 76.9 9.9 -23.1
1996 75.7 9.1 -24.3
1995 75.3 8.4
Graph showing trends in consumer price index or inflation rate and unemployment rate of
Germany for the period from 1990-2019
Description: The above figure reflects that there was a continuous rising or prevailing higher
inflation in German economy. Right from the beginning of period under consideration, that from
1990 to 2019 there seems high inflation in the economy (Horváth and Magda, 2018). In the year
1995, there was a negative inflation rate, that is, -24.3 and this negative rate indicate deflation
and corresponding fall in this rate shows that the economy is recovering from deflationary
situation and moving towards inflationary situation when this rate becomes zero, then positive
and rising thereafter continuously. Along with this rising inflation there is corresponding fall in
the unemployment rate from the year 2005. The opposite movement of these two variables,
where one variable, that is inflation is rising and the another variable, that is unemployment is

falling. This indicates that there prevails inverse relationship among these variables as notified
by Philip curve (Freund and Rendahl, 2020). This ensures that in German economic status, there
is an existence of Philip curve economic theory since 2005.
Germany who was considered to be the leader in world’s exporter, experience a great fall
in the global demand of its goods and services where its economy got severely contracted which
leads to further fall in its GDP which is reflected in the rising unemployment during the period of
2000 and 2005 (KILIÇ, KARABULUT and UĞURLU, 2018).
The other reason for rising inflation is German economy is the large supply of labor
which increases the participation of labor force which leads to higher inflation in Germany.
Consumer Price Index and Inflation rate of United Kingdom
Year Unemployment Rate Inflation rate
1990 7.1 8.0
1991 8.9 7.5
1992 9.9 4.6
1993 10.4 2.6
1994 9.5 2.2
1995 8.6 2.7
1996 8.1 2.9
1997 6.9 2.2
1998 6.2 1.8
1999 6 1.7
2000 5.4 1.2
2001 5.1 1.6
2002 5.2 1.5
2003 5 1.4
2004 4.8 1.4
2005 4.8 2.1
2006 5.4 2.5
2007 5.3 2.4
2008 5.7 3.5
2009 7.6 2.0
2010 7.9 2.5
2011 8.1 3.8
2012 8 2.6
2013 7.6 2.3
2014 6.2 1.5
2015 5.4 0.4
2016 4.9 1.0
2017 4.4 2.6

2018 4.1 2.3
2019 3.8 1.7
Graph showing trends in inflation rate and unemployment rate of United Kingdom for the period
from 1990-2019
Description: The data pertaining to UK’s economy, which is highly affected from various crisis
occurred in its economy (Freund and Rendahl, 2020). Firstly, beginning from 1990 to 1993,
during which recessionary situation occurred in UK where the rate of unemployment rises from
7.1 to 10.4% and the corresponding fall in inflation which was recorded as 8% to 2.6%. The
cause of unemployment was found out to be one fourth decline in the earnings of the company
while the reason for such fall in inflation was due to the hike interest rates and falling GDP. The
rate of unemployment thereafter seems to be continuously improving till 2005.
The another economic shock in UK’s history was the Great Recession hitting the
economy in 2008. This recession caused unemployment to rise from 5.7 in 2008 to 8.1 in 2011.
Also, inflation reduces in those five quarter in 2008 and 2009 during which great recession lasted
in the economy. The rising unemployment was due to the reason of shutting down of established
businesses and severe reduction in the economic output. After this economic crisis, the economy
was recovering greatly from the recessionary condition where it has achieved 3.8 rate for
unemployment till 2020 from 8.1 in 2011 due to continuous fall in it. On the other, seeing on the
inflation rate showing continuous fall from 2011 to 2015 and thereafter increases again.
After observing data related to United Kingdom’s economic phenomenon, no such theory
like Philip curve has been observed, as no relationship has been exhibited by two variables
during the period under consideration, that is, 1990-2019 (Eklöf and Siberg, 2018). The
economic data seems to be greatly affected by economic crisis only that was being occurred in
UK economy. But the Keynesian approach towards understanding Great depression holds true
where the economic variables such as employment and inflation gets affected due to change in
total spending of the citizens and the same has been seen in UK where economic shocks hitting
total spending affects inflation and unemployment in the economy.
CONCLUSION
From the above report it has been concluded that inflation and unemployment are two
major issues of every economy. Policymakers and regulators must consider these factors and
after effect on these factors of every policies and decisions they make, so that these factors can
be kept under control.

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