Prices are thought to be determined by the balance between supply of and demand for goods and services in the economy as a whole, or the output gap. When the economy is booming and demand is high, there is a higher probability of a rise in the inflation rate. Conversely, when the economy is sluggish and demand is weak, the inflation rate falls.
This relationship between the inflation rate and the output gap is known as the "Phillips curve" in economics. It is named after the New Zealand economist William Phillips, who first discovered the relationship between the nominal wage growth rate and the unemployment rate in the late 1950s. Since then, it has become an important framework for explaining the relationship between prices and economic activity.