In other words, inflation expectations could become more unanchored if agents start attaching more weight to past inflation in their assessment of future inflation. To illustrate that point, let me refer to the Phillips curve relationship that links current inflation to its past outcomes, the central bank’s inflation objective and a measure of economic slack.
In that framework a de-anchoring of inflation expectations would lead to a downward shift of the Phillips curve. The downward shift means that the Phillips curve would predict lower inflation for an unchanged level of slack. Lower inflation expectations can thereby exert a pronounced “gravitational pull” that keeps inflation low despite a moderate recovery under way and a gradual reabsorption of unutilised capacity.