Many of these forces continue to operate in today’s 6 economy, conceivably with greater force than in the late 1990s. In addition, measured labor productivity has continued to increase rapidly since early 2001--remarkably so, considering that productivity tends to be strongly procyclical--raising the possibility that we have underestimated the degree to which innovation and better use of existing resources have increased potential output.
If so, the true level of slack in the economy is higher than conventional estimates suggest, implying that incipient disinflationary pressures may be more intense. Of the various elements that make up the expectations-augmented Phillips curve, the degree of economic slack is the one currently providing the greatest impetus for further disinflation.