Going Underground Carries Advice for Central Banks Minding Gaps

On his first day of work at the Bank of England last year, Mark Carney traveled on the London Underground. As he alighted, he would have been urged to “mind the gap” between train and platform.

It’s unnecessary advice for any central banker. It goes to the heart of what they do. Carney and his counterparts routinely measure the distance between their economy’s output and the rate of growth that would ignite inflation. The bigger the output gap, as it’s known, the fewer price pressures.

What’s new now is it’s not just their own economy they have to master because the global output gap is as influential for inflation as the domestic one.

Bank of America Corp. economist Laurence Boone reckons in the U.S, for example, three-quarters of inflation in recent decades can be explained by consumer-price moves elsewhere.

“There is a global disinflation trend,” said Boone, head of developed European economics at Bank of America in London.

The current output gap suggests continued drag on prices, leaving central bankers room to keep monetary policy loose. The International Monetary Fund estimates the one of advanced economies ran around 3 percent of gross domestic product last year.

That’s larger than during previous recoveries. Growth topped potential by 1 percent of GDP four years after the 2003 slump and the two were in balance the same period after the 1993 trough, according to Adam Slater, a senior economist at Oxford Economics Ltd.


With emerging markets now slowing, disinflationary forces may linger even if rich nations speed up. Slater estimates that when the BRIC economies of Brazil, Russia, India and China are added to the U.S., euro area, Japan and U.K., the resulting output gap is likely to still be 2.5 percent of GDP next year.

That’s “historically quite wide and implying continued global disinflationary pressures,” he warns. “The bigger risk is still removing monetary accommodation too quickly.”

Carney and colleagues therefore need to not just mind-the-gap at home but also 请小心站台空隙 -- as they might say in Shanghai.

Before it's here, it's on the Bloomberg Terminal.