Inflationary gap

An inflationary gap is the excess of planned aggregate expenditure over the expenditure needed to buy full-employment output at the existing price level in a simplified macroeconomic model. It indicates demand pressure when productive capacity cannot expand sufficiently. It is an expenditure gap measured at the full-employment level of output, not the observed inflation rate or necessarily an actual output gap. Inflation can also arise from supply shocks, so rising prices alone do not establish this modelled gap.