Some people apparently assume that it is the speed at which the economy is growing that determines whether inflationary pressures will increase or decrease. While the rate of growth is not irrelevant, what really matters is the level of economic activity relative to the production capacity of the economy -- in other words, the margin of slack or the output gap in the economy.
The size of the output gap, interacting with inflation expectations, is the principal force behind increased or decreased inflationary pressure. Thus, one would expect inflation to start accelerating only after a period in which the level of aggregate demand had exceeded the economy’s capacity to produce on a sustained basis. That is by no means the situation we face in Canada today.