An approach to decomposing and interpreting the inflation process is proposed. It suggests that the low U.S. inflation rate in recent years reflects a structural development, but that the low levels of unemployment may be a mainly cyclical phenomenon.

A new approach is proposed for estimating potential output and the NAIRU. Identification is achieved using Okun's law and a Phillips curve. The performance of the methodology is exemplified using data from Canada, the UK, and the US.