Glossary - 3D Reset

Age-dependency ratio

The ratio of young and elderly versus the working-age population. Age-dependency ratios are rising in many developed and developing countries, including China where a less plentiful working age population has driven up wage costs. 

Artificial intelligence (AI)

Any technique that enables computers to complete tasks that typically require human intelligence.

Automation

The lower availability and rising cost of labour is likely to force companies to invest in automating processes using robotics, including smart robotics, particularly in developed countries if reshoring trends accelerate.

Carbon Border Adjustment Mechanism (CBAM)

A key aspect of the European Union’s climate policy framework. It will force companies that import into the EU to purchase so-called 'CBAM certificates' to pay the difference between the carbon price paid in the country of production and the price of carbon allowances in the EU Emissions Trading Scheme.

Carbon pricing

Schemes which incentivise the reduction of carbon emissions. This approach involves putting a price on pollution, either in the shape of ‘cap-and-trade' systems, such as the EU Emissions Trading Scheme, or carbon taxes, such as the Carbon Border Adjustment Mechanism. 

Collective bargaining power

The process by which labour, through its unions, negotiates contracts with employers to determine their terms of employment. Collective bargaining power was an important feature of labour markets in many developed countries generally in the 1970s and 1980s, and in some continental European countries up until the eurozone Sovereign Debt Crisis of 2011/12. With regards to the latter group, the debt crisis brought to the fore issues around competitiveness and drove wholesale reform of labour resulting in more flexible labour markets. The debt crisis underlined how many European countries had to reduce labour costs relative to competitors to stimulate growth through higher exports and improve their fiscal space.

Core inflation

Core inflation – which strips out food and energy prices – is a better measure of underlying price trends than headline inflation measures which includes these volatile components. 

Decarbonisation/energy transition

The process by which countries move away, or transition, from energy systems powered by fossil fuels, including oil, natural gas and coal, to ones powered by renewable sources such as wind and solar. 

EU Emissions Trading Scheme (EU ETS)

The EU Emissions Trading Scheme was the world’s first major carbon market and is one of the largest. This “cap-and-trade” system limits the amount of emissions that can be released from industrial installations in a certain number of sectors.

Fiscal space

This is the room for governments to undertake discretionary fiscal policy - tax and spend policies - without endangering access to funding and debt sustainability. 

Flexible labour markets

Flexible labour markets helped to underwrite the Non-Inflationary Consistently Expansionary, or “NICE” era between the mid 1990s and early 2000s. Reforms of labour markets in many developed countries have helped break the link between inflation and wages, which might have previously been explicitly indexed to inflation. More flexible labour markets are one reason why many economists don’t expect a return of the inflation-prone 1970s and 1980s, when the collective bargaining power of labour in developed countries was, in general, much stronger.

Fossilflation

An element of inflation related to fossil fuels. This will occur over the next decade as a result of stricter carbon pricing when many economies will still be heavily reliant on fossil fuels before completing their energy transition. 

Global value chains

Their creation involved a long process of breaking down different stages of production and often locating them in different economies/geographies. This provided benefits such as lower costs, economies of scale, specialisation, and higher efficiency. 

Globalised model of extended supply chains

This describes the economic system based on global value chains. The system developed as a result of the globalisation trend which was at its height between the 1990s and early 2000s. China sits at the heart of this system, having become so dominant in manufacturing that it is often referred to as the “factory of the world”. 

Green subsidies

The alternative to putting a price on pollution through carbon pricing is to incentivise the reduction of carbon emissions by inducing innovation through green subsidies. This is the approach being taken in countries like the US, with green subsidies introduced under the Inflation Reduction Act. 

Green technology

A term describing the sectors required to build green economies such as carbon capture and storage, new transport infrastructures, smart power grids, and sustainable hydrogen, which are all required for the energy transition.  

Greenflation

A further element of inflation resulting from a shortage of key minerals required for the energy transition. 

Inflation growth trade-off

Higher interest rates are required to slow economic activity in order to slow inflation and restore price stability, so the cost/trade-off for restoring price stability is lower growth. 

Labour participation rate

The labour participation rate shows the percentage of the population aged over 16 who are working or actively looking for work. Falling labour participation rates since the Covid-19 pandemic – which encouraged many into retirement, or economic inactivity due to ill health – have resulted in labour shortages in many developed economies, which have been an important driver of inflation. 

Lowflation

Describes the economic regime in many developed economies following 2007/08 Global Financial Crisis, when there was the constant threat of deflation (falling prices).

Nearshoring/friendshoring

Moving production from a distant country to a nearby one (nearshoring), or one deemed to be a political ally (friendshoring). Both of these trends represent partial withdrawals from the globalised model of extended supply chains, international trade and globalisation. 

Non-Inflationary Consistently Expansionary, or “NICE” era

In large part driven by globalisation, the era began in the late 1990s and was characterised by steady growth, a steady decline in the unemployment rate and low and stable inflation in developed countries.

Offshoring

The process by which multi-national corporations moved production from developed countries to less-developed countries. It proved to be a very successful corporate strategy between the 1980s and early noughties.

Onshoring

A reversal of offshoring; the process of moving production back to the developed country in which it was originally located.  

Price stability

A situation of low and stable inflation which benefits companies by creating the best conditions for them to invest and expand with confidence, while consumers, businesses and government all benefit as interest rates remained in check. 

Protectionism

Policies which discriminate against companies from abroad in favour of those based in the home country, through the use of taxes, tariffs or regulations.   

Services inflation

Services inflation is dominated by the cost of labour and gives an indication to what degree inflationary pressures are engrained in a domestic economy, as opposed to the result of external, and possibly, transitory factors. pposed to the result of external, and possibly, transitory factors. 

Smart robotics

Combining robotics and AI to create machines which can operate independently and communicate with other machines.

Stagflation

A combination of slowing growth and accelerating inflation. This has occurred in the past following the loss of price stability due to wage price spirals as workers achieved pay increases even after inflation and growth had begun to slow. They were one reason why many developed economies in the 1970s and 1980s were so inflation-prone. They were partly the result of the collective bargaining power of labour being, in general, much stronger. 

Supply-side solutions

These are seen as a possible answer to alleviating labour shortages in many developed countries, specifically by relaxing immigration controls. They have, however, been deemed increasingly difficult to achieve following a move to more protectionist policies as seen in a post-Brexit UK and post-Trump US.  

Wage price spirals

A situation where workers demand higher pay increases, which companies then pass on to consumers in the form of price rises, reinforcing inflation trends. 

Working-age population

The working-age population is generally defined as those aged 15 to 64 years old as a proportion of the total population.

World economic order

The post World War II economic system based on cooperative multilateral organisations governing the key aspects of the global economy. This resulted in the rapid growth of international trade under the governance of the World Trade Organisation.