Although some uncertainty surrounds the time span needed for this increase to take place, the medium-term determinants of inflation are intact. Just as weak domestic demand dragged on inflation, so, too, will a waning output gap drive inflation higher.
The Phillips curve is still alive and well.7 Looking at Germany, for example, labour markets are already largely cleared and unit labour costs are accordingly expected rising by 1 ½% this year and to go up by just under 2% in the coming years.