RDP 2003-10: Productivity and Inflation 8. Conclusion

This paper has explored the relationship between inflation and productivity growth. Using measures of productivity and inflation for single-digit Australian market-sector industries, we find a statistically significant relationship between these variables. After accounting for the business cycle, we argue that what seems to matter for productivity outcomes is economic agents' immediate inflationary environments. In particular, industry inflation appears more important in explaining productivity than aggregate inflation. Also, the distribution of firms of different sizes in an industry seems to matter.

Taken together, the results are consistent with international evidence of a negative relationship between inflation and productivity growth. Hence they suggest that a part of the productivity slowdown of the 1970s and its acceleration in the 1990s can be attributed to the rise and fall of inflation, though undoubtedly other factors were also at work. They also suggest that it is important to consider industry level forces when analysing the aggregate trends.