Based on our estimates, even with the entire fiscal and monetary stimulus, the economy is still saddled with roughly $1 trillion of excess capacity. In other words, the output gap is around 7% and has never been this high two years after the end of a recession. And in such an environment, the prospect of seeing inflation fail to decline...
It is against this massive level of unutilized resources in the industrial space that business intentions to raise prices have recently plunged. The return of inflation remains a consensus forecast, but certainly not a realistic prospect for coming months, quarters, or perhaps even years, as long as aggregate demand is playing catch-up to aggregate supply. The math is daunting but uncomplicated.
After all, to eliminate the output gap (the gap between where GDP actually is and where it would be if the economy was operating at full capacity) we would need to see real growth of 4% for each of the next six years or 5% over the next three years. We doubt even the most optimistic forecaster believes that demand conditions will be that robust, even after we come out the other side of this credit collapse.
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