Equity valuations have also turned around. After dropping roughly 50 percent between early 2000 and late 2002, the Wilshire 5000 has now reversed nearly half of that decline. Investor confidence seems to have recovered, at least somewhat, from the corporate governance and accounting scandals revealed in 2002 and 2003.
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.