Under normal conditions, longer-term inflation expectations should remain unaffected by transitory shocks that typically dissipate over the medium term, such as those related to oil prices. However, recurrent shocks that lead to either a prolonged period of above- or belowtarget inflation can be misinterpreted as a lasting change in underlying inflation.
In my earlier example, if the central bank tolerates a prolonged period of declining mark-ups, and headline inflation is weaker than the central bank’s target, then the Phillips curve in all likelihood will reanchor around a lower medium-term inflation level. In the worst scenario, self-reinforcing spirals may result, as firms and households start to extrapolate from past inflation outcomes.