Together with demand recovery, lower potential growth seems to be contributing to the recent rise in inflation through the tighter capacity constraint. In fact, the latest output gap is estimated to be largely balanced (Chart 4).
We often hear anecdotes of capacity constraint, especially those related to labor shortages, partly because the current economic recovery is driven primarily by the non-manufacturing sector, which is inherently more labor intensive and thus absorbs more workforce than otherwise. Under these circumstances, raising potential growth is of vital importance.