The decline in potential growth is good news for the inflation outlook

The decline in potential growth (we look at the situations of the United States and the euro zone), due to the decline in labour supply in the United States and in labour productivity in the United States and the euro zone, is bad news if the objective is growth and purchasing power, but good news if the objective is to reduce core inflation. The reason is that if potential growth declines, it becomes easier for central banks to raise the real interest rate above the growth rate, and therefore to reduce activity and core inflation. The trend in the United States and the euro zone is indeed towards a reduction in potential growth, which makes it possible to lower the level of interest rates needed to drive down core inflation.