This line tracks the rise and fall of inflation...
...the rate at which prices increase across the economy
For years central banks, like America's Federal Reserve...
...thought they understood why inflation fluctuated...
...and how to keep it steady
Central banks felt that as long as...
...they could keep inflation on an even keel...
...it was probably a sign...
...that they were also keeping the economy on an even keel
But for the past decade inflation hasn't played by the rules
Despite high employment before the pandemic in places like America...
...which normally causes inflation to rise...
...it's been mysteriously low across much of the rich world...
...and central banks seem unable to revive it
Low inflation means that central banks are less powerful...
...than we thought or less powerful than we hoped
This is particularly worrying...
...as the world faces a period of profound economic uncertainty...
...making it more important than ever...
...to solve the great inflation mystery and repair the global economy
Inflation is when prices rise across the economy
It helps explain why a Big Mac cost less than $3 twenty years ago...
...but is nearer $6 today
The traditional explanation is too much money chasing too few goods
According to this logic, if a central bank prints too much money...
...or makes it very easy to borrow money...
...by keeping interest rates low...
...then prices will rise
Events like wars...
...which cause a shortage of goods...
...can also increase prices
So a little bit of inflation doesn't really hurt anybody...
...but when inflation is high and volatile and when it's unexpected...
...it can do a lot of damage to the way a capitalist system runs
It can make planning very difficult
It can make borrowing money and lending money very difficult...
...because you don't know how much you're going to get back...
...and so in countries that suffer high inflation...
...you see a breakdown in long-term borrowing
To avoid extremes of inflation...
...most central banks try to keep it at around 2%
To stop inflation rising, they can increase interest rates...
...making it more expensive for everyone to borrow money...
...which slows the economy and lowers inflation
Predicting when central banks need to intervene to curb inflation...
...used to be pretty straightforward
Thanks in part to observations published in 1958...
...by an economist from New Zealand called A.W. Phillips
He was a tremendously resourceful man
As a schoolchild, for example, he rebuilt a truck from scratch...
...and drove it himself to school, taking his friends along with him
He was also a prisoner of war during the second world war...
...and famously created some secret radios and tea heaters
Phillips observed that wages in Britain...
...tended to rise faster if employment was high
He plotted the relationship between salary rates-of-change...
...and unemployment levels on a graph...
...to produce what is known as the "Phillips Curve"
The Phillips Curve was used by central banks to help predict inflation
As, if lots of people were in work and wages were rising...
...it tended to lead to price increases
If unemployment is low and wages are therefore rising faster...
...that puts upward pressure on costs...
...and firms will feel confident passing...
...those higher costs on into higher prices...
...because the economy is presumably doing quite well
The opposite is also true
When the economy is weak and unemployment is high...
...wages stop rising...
...and firms can’t raise prices much without losing customers
This theory was pushed to the extreme in the 1970s
A spike in the price of oil and overspending to fund the Vietnam war...
...meant that inflation was rising rapidly in America
So Paul Volcker, the head of the Federal Reserve...
...raised interest rates to a record 20%
This huge hike in interest was known as the "Volcker Shock"
And brought inflation down by the 1980s
Labour leaders are increasingly speaking out...
...about the credit-crunch policies of Mr Volcker's Federal Reserve
It created mass unemployment in the US
But it did ultimately have the effect of curbing inflation...
...and as a result, inflation did come down from double digits
But the idea that ups and downs in employment...
...explained changes in inflation, didn't last...
...giving rise to one of the great economic conundrums...
...of the modern world
The signs were everywhere
But now it's official...
...we are in a recession
We received yet another round of alarming employment figures...
...the worst in more than 30 years
The global financial crisis of 2007-2009 caused...
...mass unemployment in America…
...but strangely inflation didn't fall very far
And as the economy recovered...
...and unemployment reached a 50-year low in America in 2019...
...inflation remained mysteriously low...
...baffling economists and politicians alike
Some economists declared that the Phillips Curve was dead
I think a more mainstream view was that it was merely hibernating
This mystery of low inflation led to....
...a radical rethink about what was causing prices to stagnate
One explanation is that central banks have kept inflation low for so long...
...that people no longer expect inflation to rise...
...even in a jobs boom
And firms are more reluctant to raise their prices or wages....
...if they don’t expect anyone else to do the same
Another theory is that globalisation has helped keep prices low...
...because it’s led to an influx of cheap imports
Central banks have run out of room to cope with globalisation...
...because interest rates have been so low since the global financial crisis
And so if you do get downward pressure on prices from...
...for example, manufactured imports from emerging economies...
...central banks don't any more have the room...
...to offset that by allowing other prices to rise faster
Other economists say that because...
...firms didn’t cut wages much during the financial crisis...
...to protect worker morale...
...they didn’t raise wages much during the recovery
And this slowed inflation
Pay and inflation would eventually rise...
...but it would take time
And before inflation had the chance to correct itself...
...the pandemic hit
But an unexpected outcome of the disruption caused by the pandemic…
...might actually help raise inflation and get it back on track
The US Senate has unanimously approved...
...what is essentially $2trn of economic triage
Lowering interest rates almost down to zero
The pandemic has led to far greater co-operation...
...between central banks and governments
As central banks have printed money...
...governments have offered stimulus packages...
...ensuring that people are able to spend it
If governments can borrow and spend...
...in the knowledge...
...that they won't put upward pressure on interest rates...
...because central banks will stop that from happening...
...then that should be quite a powerful stimulant to the economy
This co-operation could...
...not only be enough to pick inflation up off the floor...
...it could also help repair the global economy