This is the harder part of the question, and there are several ways to answer it (see the textbook for further description). Consider an international oil price spike, for instance. If the home population has backward looking expectations of inflation, then the central bank, by allowing the oil price increase to pass through into inflation, will be condemning itself to a long period of higher inflationary expectations on the part of the general public and thus higher realised inflation (since the PC shows that actual inflation is an increasing function of expected inflation). To avoid this, the central bank may hike interest rates in response to an oil spike. This will cause a domestic recession, but it will keep inflation from rising. If, instead, the homepopulation expects inflation to be at the level of the central bank's target, and theexpectations are well-grounded at that level, then the central bank may instead decide to do nothing in response to the oil price spike and allow inflation to risetemporarily. It won't face the same incentive to artificially induce a recession inorder to keep short term inflation low.

I did not understand the two parts which are highlighted, how? what is the realised inflation, why pc is not showing the actual inflation? how to avoid it by hike? ANSWER DIRECLTY TO MY QUESTIONS PLEASE, THANK YOU