Figure 6 illustrates this point with a stylized example of the inflation consequences of a gradual increase in the level of import prices – perhaps occurring in response to stronger real activity abroad or a fall in the exchange value of the dollar – that causes the rate of change of import prices to be elevated for a time.
22 First, consider the situation shown in panel A, in which households’ and firms’ expectations of inflation are not solidly anchored, but instead adjust in response to the rates of inflation that are actually observed.