First, it fits with research we published earlier this year on the flattening in the observable Phillips Curve – that is, how inflation appears to have become less responsive to falling unemployment and rising capacity pressure.
Our research shows this to be driven by an increase in the volatility of business cycle surprises on the supply-side, rather than the demand-side.14 This reinforces the idea that supply-side shocks have been more responsible for low inflation than in the past, masking the underlying and continuing positive relationship between demand-led activity and inflation.