Understanding Inflation Dynamics: Where Do We Stand?

I summarize recent advances in the literature on inflation dynamics. This has been a very productive area of research due to the development of the so-called New Keynesian model and the availability of new macroeconomic and microeconomic evidence. Nevertheless, there still remain a number of puzzles. In particular, the importance of temporary price markdowns for inflation dynamics and the characteristics of the information set price setters use for their price adjustment decision, currently constitute unresolved issues.