Conflicts between macroeconomic objectives

Trade-offs between objectives: inflation and unemployment on the short-run Phillips curve, growth and the current account, the environment, equality and the national debt.

Inflation 3.5%, unemployment 4.7%.

CPI inflation rose to 3.5% in the year to September 2026, well above the 2% target, pushed up by fuel prices. Unemployment was 4.7%, down from 5.2% at the turn of the year. The Bank of England’s Monetary Policy Committee has been split: raising rates could bring inflation down but cost jobs, while holding them supports jobs but risks higher inflation.

Why can’t the government hit every objective at once?

Source: Office for National Statistics, Consumer price inflation, UK: September 2026; Labour market overview, UK: October 2026.

A trade-off.

A conflict (or trade-off) between objectives is when a policy that helps one objective makes another worse.

The main conflicts:

• Low unemployment and low inflation
• Economic growth and the current account
• Economic growth and the environment
• Economic growth and equality
• Stimulating the economy and keeping the national debt under control

Growth has costs too.

• Growth and the current account: as incomes rise, people buy more imports, so a current account deficit can widen.
• Growth and the environment: more output can mean more pollution, carbon emissions and use of finite resources.
• Growth and equality: the gains from growth may go mainly to those with the most skills or wealth.
• Stimulus and debt: higher spending or tax cuts to boost growth raise borrowing and the national debt, which must be paid for later.

Think first

The government boosts AD to cut unemployment.

Firms compete harder for workers. What is most likely to happen to inflation?

As unemployment falls, workers are scarcer, so wages rise faster and firms pass on the costs. Higher AD also lets firms raise prices. Less unemployment tends to come with more inflation in the short run: a trade-off.

Step by step

1. The <b>short-run Phillips curve</b> (SRPC) shows the trade-off between inflation and unemployment. It slopes downward: lower unemployment comes with higher inflation.

   Check: A trade-off between objectives means:

   Policymakers have to choose which to prioritise.

2. At A, unemployment is 8% and inflation 1%. A rise in AD moves the economy up the curve to B: unemployment falls to 4%, but inflation rises to 4%.

3. The trade-off can also run the other way. Raising interest rates to cut inflation moves the economy down the curve, towards higher unemployment.

   Check: To bring inflation down using demand-side policy, the cost is likely to be:

   Moving down the curve means less inflation but more unemployment.

4. Summary: demand-side policy usually faces trade-offs, so governments must decide which objective matters most right now. Supply-side policy offers a way to improve several objectives at once, but only slowly.

A common mistake

The SRPC slopes downward: lower unemployment comes with higher inflation, not lower. That is the whole point of the trade-off.

Exam question

Explain why there may be a conflict between reducing unemployment and keeping inflation low.

Model answer

To reduce unemployment, the government might use expansionary fiscal policy, or the Bank might cut interest rates, raising aggregate demand.

Firms sell more, so they hire more workers and cyclical unemployment falls. But as unemployment falls, workers become scarcer, so firms must offer higher wages to attract them. Higher wage costs are passed on as higher prices. And as the economy approaches full capacity, higher AD pulls up prices directly: demand-pull inflation.

[Diagram: short-run Phillips curve, with a movement from A (high unemployment, low inflation) to B (lower unemployment, higher inflation).]

So reducing unemployment tends to raise inflation, a movement up the short-run Phillips curve. However, supply-side policies that raise productive capacity can reduce unemployment without raising inflation.