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Thoughts in Charts: Watching the Output Gap

Unprecedented amounts of stimulus are entering our economy. With large amounts of money flooding the economy, shouldn’t we be worried about inflation?

This week’s chart illustrates one of the reasons most economists presently consider inflation a low risk. The output gap is the difference between the value of all the goods and services produced within the U.S. currently (GDP) versus what a healthy U.S. economy is capable of producing at full employment (Potential GDP).

The output projections recently published by the Congressional Budget Office predict that it will be a long time before the U.S. economy recovers enough to close that output gap. Until then, there should not be enough sustained demand pressure to drive up general price levels.

While this is not at the top of our worry list, we are watching this gap carefully. If the recovery happens faster than expected, inflation becomes more of a possibility.

Sources: Congressional Budget Office; Bureau of Economic Analysis. “An Update on the Economic Outlook: 2020 to 2030”.  July 2020. https://www.cbo.gov/system/files/2020-07/56442-CBO-update-economic-outlook.pdf

The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceeds potential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.

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