This two-way game has no room for supply shocks or inertia”. This second approach produces what is called the New Keynesian Phillips Curve (NKPC) that basically focuses on the output gap and expectations and is a crucial part of the DSGE models, where the interest rate is all-powerful to control demand and therefore inflation.
The expansion of supply capacity can also be expected in domestic labour markets, through the reversal of the pandemic-related drop in the labour force participation rate and the return of many international workers that had temporarily gone back to their home countries. Third, the largest single contributor to the currently-high inflation rate has been the surge in energy prices.