When the output gap is negative (ie, actual output is below potential), inflation usually declines.
When output is below its potential, inflation tends to fall even if growth is brisk.
When the output gap is negative (actual output is below potential), as at present, inflation usually falls.
Frances O'Grady is deputy general secretary of the TUC Britain's output is below the level it was two years ago when the coalition took office.
As a rule of thumb, when output is below potential (ie, the output gap is negative) inflation tends to fall; when output is above potential, inflation rises.
If, as now, the output gap is negative (ie, actual output is below potential) inflation falls; if the gap is positive, inflation rises (see chart 1).
Their thinking is built around the concept of an output gap; while output is below trend, then inflation will not appear.
And this will be destructive; not only will output be below potential, but depressed incomes and deflation will make it harder for the Sams to pay down their debt.
And that is the role central banks have been playing in recent years, easing monetary policy at a time when economic output is below trend and the scope for fiscal stimulus has been reduced.The most controversial aspect of this support has been "quantitative easing" (QE), the creation of money to buy assets, mostly government bonds.
Clearly, the dating of business cycles cannot rely on a simple mechanical exercise of recording when output is below or above some threshold.
