Tomas Hirst at Piera has posted a thoughtful, if modestly technical, piece on the UK’s productivity puzzle.
Tomas suggests that there are essentially two reasons why the UK’s productivity growth remains sluggish: either a temporary set back in demand or a more structural impact to supply.
He notes that is clearly a mixture of both, but suggests that the inflation rate is an indication of which dynamic is currently having a strong impact on the economy.
If its the demand side, then the inflation rate should be low; if it’s the supply side constraints that are dominant/persistent, then we should see higher inflation rates.
But as Tomas asks:
if monetary policy has already succeeded in fully offsetting the demand shock from the crisis and the UK is now simply facing supply-side chokes, where’s my inflation?
