Does economic growth cause inflation? Sometimes—and that sometime is now
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Two challenges limit the value of this simple theory. First, we don’t have a good handle on how much the economy can produce. Second, there is a substantial gray area around potential output. In this case, imagine that a salesperson comes in and tells the general manager that a hot prospect will buy if a discount from list price is offered. The business will likely grant the discount to get the volume, keeping their workers busy and utilizing some of the previously-unused capacity.
The culprit in this inflation acceleration is not economic growth per se, but economic growth in excess of the economy’s capacity to produce goods and services. That takes us back to the number of people with jobs, and their productivity per hour worked.
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