Tuesday, September 15, 2009
Inflation is firmer than thought. The BoE relies heavily on the output gap as a determinant of inflation, in that the lost capacity acts as a productivity buffer in the face of demand. I have my doubts about this methodology. Sure for a large company cutting capacity perhaps they can bring that capacity back online. But there are many SMEs in the UK, a number of which have closed. Although an SME can close overnight, to start over to build even a 20+ worker company can take many many years i.e. they are not part of an output gap they are -lost- capacity. Quite aside from sounding suspiciously like unemployment being used as an inflationary control measure. Unless they dovetail with public sector cuts, in which case I am all for it.