If these developments are structural, this will steepen the Phillips curve, which will also increase upward pressure on prices. Third, it is likely that a mechanism will operate through which improvements on the supply side increase people’s medium- to long-term inflation expectations.
If people expect that economic activity and sales will continue to improve, their inflation expectations will increase – considering, for example, the Phillips curve relation in the future. This mechanism is called forward-looking expectation formation of the New Keynesian Phillips curve. Improvements on the supply side thus increase people’s somewhat long-term inflation expectations, and in turn shift up the intercept of the Phillips curve.