In their zeal, the inflation fighters fail to distinguish between different causes of inflation, which may demand different policy responses. This undiscriminating inflation phobia, of course, carries its own risks. It could prove to be dangerous for the economy's health if it leads to the unnecessary sacrifice of jobs and living standards. It is impossible to imagine stronger evidence discrediting the theory of the natural rate of unemployment than events of the past five years. These events ought to give us the opportunity to decisively break with natural-rate thinking and to put in place a new framework for making monetary policy.
Higher productivity can mean lower inflation.
Productivity growth is good for the economy because it provides us with the means to produce more from our existing pool of resources, and in doing so it provides the basis for a rising standard of living. Low unemployment goes with higher productivity. The jump over the past four years in productivity growth coincides with unemployment falling below 5 percent and with an end to real wage decline for those in the bottom half of the wage distribution. A tight labor market appears to have forced firms to use workers more efficiently and to invest in new equipment that enhances the productivity of workers. As well, strong demand conditions have meant that existing capacity has been more fully used, thereby adding to supply.