Potential supply matters! If an economy is producing less output than it could, then there are resources that are being wasted. And when these resources are human – that is unemployment – this carries an additional social cost. But why, specifically, should it matter for an inflation-targeting central bank? Presumably, because it is a good indicator of inflationary pressure! The trouble is that there are good reasons to think that this is not actually the case. And economic theory suggests there is a much better measure of inflationary pressure we can use.