First, under the present circumstances, the effects of a widening of the output gap on inflation might have become less pronounced.4 Second, there is a possibility that the expanding trend of the output gap will not continue.
If the expanding trend of the output gap becomes even more robust, firms will likely increase prices and wages to better reflect a rise in costs and a tightening of labor market conditions. These firms' moves will likely progress more than an increase in households' tolerance of price rises.