In this scenario, the output gap is smaller because the long-term growth rate is smaller, and it only needs relatively smaller amounts of growth to lead to inflation.
But he says he expects inflation to weaken in the years ahead, as technology-induced changes are likely to lead to empty buildings and structurally higher unemployment as many of the habits of the pandemic become part of the new normal.
As people leave one sector of the economy and switch to another, former shops will be empty for periods of time, and staff will be unemployed until they retrain.
This type of unemployment is known by economists as “frictional”, and happens even when economies are growing. But if the frictional rate of unemployment is high, it is unlikely that wages will rise, and with commercial properties vacant, it is unlikely that rents would rise, and both of these factors would hold inflation back over the medium term.
John Butters, chief investment officer at Weatherbys Private Bank, says government bond yields have been very low for much of the past decade because markets are pricing in low growth and inflation over the longer term.
David Thorpe is special projects editor of FTAdviser
david.thorpe@ft.com
