The augmented Phillips curve is a version of the Phillips curve that says inflation depends not only on unemployment or slack, but also on what people expect inflation to be.
The core idea
The original Phillips curve suggested a stable trade-off between inflation and unemployment. The expectations-augmented version changed that view by showing that if workers and firms expect higher inflation, wage and price setting will build that expectation into actual inflation.
A simple version is:
$$ \pi_t = \pi_t^e - \alpha (u_t - u_n) + s_t $$
where (\pi_t) is inflation, (\pi_t^e) expected inflation, (u_t) unemployment, (u_n) the natural rate, and (s_t) a supply shock.
Why it matters
The model implies there is no permanent trade-off between inflation and unemployment if expectations adjust. Policymakers may push unemployment below its sustainable level temporarily, but inflation will keep rising if expectations catch up.
Policy significance
This framework was central to the critique of naive demand management in the 1970s. It shifted macroeconomics toward expectations, credibility, and the distinction between short-run and long-run Phillips curves.