Caroline Baum questions the accuracy, timeliness, and, ultimately, the usefulness of the Federal Reserve’s main gauge of inflation pressure in the system  – the “output gap” – in today’s column at Bloomberg.

What is it that no one can see, hear, smell, taste or touch, yet everyone knows is there?

Answer: the output gap.

In common parlance, the output gap is the difference between what the economy can produce and what it is producing at any given time. The fact that we can’t measure the first with any degree of accuracy and are still revising the second 30 years after the fact has never shaken the faith of those relying on the output gap to gauge future inflation.

Nor did the experience of the 1970s, a period of high unemployment (lots of unutilized labor) and high inflation, sour economists on their chosen yardstick.

Instead of inspiring caution about a theory that relies on the debunked Phillips Curve — a representation of the presumed trade-off between inflation and unemployment — the ‘70s experience was filed away under “measurement error.” The seismic shift (down) in trend productivity growth lowered potential growth, and an easy monetary policy goosed demand for goods and services beyond the economy’s ability to supply them.

As in the 1970s, it seems the central bank would be quite surprised to see any substantive inflation develop today with U.S. unemployment high and factories chugging along at a full ten percentage points below the normal level of utilization. Of course, over the last ten years, they’ve been quite surprised by a lot of things, not the least of which was all the trouble they caused by keeping rates too low for too long six or eight years ago.

Oh yeah, that’s right. The Fed still thinks that low rates had nothing to do with inflating the asset bubbles that led to multiple financial market meltdowns in recent years…