Rethinking conflict inflation: The hybrid Keynesian-NAIRU character of the conflict Phillips curve

Abstract

This paper presents a new formulation of conflict inflation labeled the "pass-through" approach, which contrasts with the existing "pressure balance" approach. The model generates Phillips styled inflation - unemployment dynamics that are a hybrid of Keynesian and NAIRU dynamics. Conflict inflation arises when economic activity rises above the consistent claims activity level, and it is subject to self-propelled conflict accelerationism. Immediately below that level, inflation holds constant at the expected rate. At low activity, accelerating disinflation can develop. Worker militancy, corporate aggressiveness, negative supply shocks, and upward commodity price shocks all contribute to conflict inflation. They do so via two channels. First, they increase the intensity of conflict by increasing the degree of income claims inconsistency. Second, they lower the activity level at which conflict inflation kicks in. Policy can affect the consistent claims economic activity threshold at which conflict inflation kicks in. However, there may be adverse interaction effects with aggregate demand. Conflict inflation is best addressed by unconventional policies, such as incomes policy. Institutional developments in the Neoliberal era have likely reduced the relevance of conflict inflation.