7 Note that inflation [Figure 3] edged higher in the downturn phase and remained at elevated levels thereafter, at a time when the accumulating margin of slack in labour and product markets could in fact have been expected to reduce price pressures. Again, compare these developments with the sharp disinflation which occurred, during the same period, in the United States.
Of course, we cannot directly observe full capacity of either labour or other production factors. Consequently, we can never be certain about the level of activity that would represent the full utilisation of available resources, and even less so about the strength of the relationship that links utilisation and inflation.