Current inflation is affected by three things:
1) the rate of inflation people expected in the previous period, because it figured into their previous wage and price-setting decisions
2) the output gap: when output is above its natural level, firms experience rising marginal costs, so they raise prices faster. When output is below its natural level, marginal costs fall, so firms slow the rate of their price increases.
3) a supply shock (e.g. sharp changes in the price of oil), as discussed in Chapter 13