Why are the high-income countries not mired in deflation? This is the puzzle today, not the absence of the hyperinflation that hysterics have wrongly expected. It is weird that inflation has remained so stable, despite huge shortfalls in output, relative to pre-crisis trends, and prolonged high unemployment. Understanding why this is the case is important because the answer determines the correct policy action. Fortunately, the news is good. The stability of inflation seems to be a reward for the credibility of inflation targeting. That gives policy makers room to risk expansionary policies. Ironically, the success of inflation targeting has revitalised Keynesian macroeconomic stabilisation.

A chapter in the latest World Economic Outlook from the International Monetary Fund presents the case for this encouraging conclusion, as has already been noted by, among others, Gavyn Davies and Paul Krugman. Its starting point is with the stickiness of inflation, despite the lengthy period of very high joblessness. Thus, states the IMF, “we find a dog that did not bark”.

A possible explanation for this phenomenon is structural. It is argued by many, for example, that the workers who lost their jobs in construction and other bubble-era activities have the wrong skills or are located in the wrong places to take up the new jobs that might now – or soon – be on offer. Again, if unemployment is allowed to remain high for long, what starts as temporary joblessness is likely to become permanent, as workers lose the skills and networks that make it relatively easy to find jobs. So the duration of the Great Recession has put long-term joblessness near record levels. All this tends to make competition in labour markets weak.