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Edmund S. Phelps is an American economist, who was awarded the 2006 Nobel Prize for Economics for his analysis of intertemporal trade-offs in macroeconomic policy, especially with regard to inflation, wages, and unemployment.
Inflation drives up the cost of everyday goods, affecting what you pay for items both large and small.
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In the late 1960s Phelps began his prizewinning work, which challenged a long-held assumption that high levels of unemployment corresponded with low levels of inflation, and vice versa. Policy makers had assumed that expansionary fiscal and monetary policies (policies that expanded demand) could contain unemployment levels. While this policy approach can influence short-term fluctuations in employment, it does not affect the long-term employment rate. Phelps observed that price- and wage-setting behaviour is based on expectations of future conditions. He demonstrated that workers will demand higher wages when costs of living (and therefore inflation) exceed their expectations. He further proved that inflation will be contained only after employment levels reach an equilibrium point. In fact, Phelps showed that unemployment is a natural part of a balanced economy: equilibrium is achieved when the economy reaches its natural rate of unemployment.
