Many of the relative price movements churning the current inflation numbers will likely prove to be temporary. But the recent pattern of persistently higher-than-expected rates of inflation, together with other signs of capacity pressures, may be indicating that our economy is operating closer to capacity than the Bank had previously thought.
The downside risk: deflation Let me now turn to the potential downside risks on the price front—deflation, which is a persistent decline over time in the average prices of goods and services. We have all heard a lot about the toll that deflation has taken on Japan.