According to the standard view, the Phillips curve explains the inflation process in terms of three main elements. The first element is expectations of future inflation. Expectations can be forward-looking, in which case inflation is self-equilibrating; or backward-looking, in which case inflation is more persistent. The second element is economic slack, which captures the impact of aggregate demand.
While slack has traditionally been measured by an output gap or unemployment gap, recent research suggests that more granular indicators of labor market conditions are needed to better capture Phillips curve relationships in the data.1 The third element is shocks. These shocks can in principle have a positive, negative or ambiguous effect on inflation. If shocks are more permanent, inflation will be more inertial.