Article content continued

Economist William Phillips initially studied the inverse relationship between wage increases and unemployment between 1861 and 1957. Phillips found that wages rise when employment rises to attract workers, who can afford to be more discerning. The curve was later adapted to note an inverse relationship between unemployment and inflation — prices rise, when falling unemployment lifts wages, to accommodate rising costs.

“As workers have more choices, they demand higher wages — and, at the same time — business who pay more in wages will raise prices to protect their bottom line. ‘More employment causes more inflation’ is how the theory has worked since the Second World War,” TD economist Michael Dolega said.

Until now.

Whereas historically, the curve was a curve — with an X axis for unemployment and a Y axis for inflation — sloping downwards as unemployment rises, it’s now a mostly flat line.

That’s a problem for central bankers and policy makers, and it suggests bad news.

Canada’s jobless rate has fallen to 6.3 per cent, its lowest since October 2008, but inflation has lagged. From 1996 to 2008, TD noted, headline inflation averaged 1.8 per cent, roughly in line with the Bank of Canada’s recently-renewed 2 per cent mandate. Since the crash, from January 2009 to present, headline inflation has averaged just 1.5 per cent, despite the benchmark interest rate dropping to record lows for much of that same period.

The picture looks the same throughout much of the western world and many economists are perplexed.