However, a more substantial and permanent slowdown in productivity growth would put continuing upward pressure on costs that firms eventually would need to recover by raising prices more quickly. To some extent, though, the monetary policy response to slower productivity growth also depends on whether or not these changes take businesses and workers by surprise.
If they do, demand might also be reduced as capital investment looked less profitable and as households cut back on consumption to match their lower expected earnings over time. Unfortunately, we cannot directly observe some of these critical determinants of inflation - slack in the economy, the intentions of people not in the labor force, or structural productivity growth.