FROM THE PERSPECTIVE OF central banks, the past few years have been tough. This is true even if we ignore their role in the bailouts that occurred as a result of the financial crisis that peaked in 2008. Central banks, including the Bank of Canada, have faced other difficult situations, including a higher unemployment rate and rising prices. In Canada, the unemployment rate rose, and remained relatively high, compared to what it was before the crisis. But our inflation rate was also rising—from 0.26% in 2009 to 2.92% in 2011. This posed an unwelcome dilemma for the Bank of Canada. Should it have focused on fighting inflation, or should it have kept trying to bring down unemployment?

Canada was not the only country facing this dilemma. Across the Atlantic Ocean, British inflation was rising too: in February 2011, consumer prices were 4.4 percent higher than they had been a year earlier, a rate of increase far above the comfort level of the Bank of England (the British central bank). At the same time, the British economy was still suffering the after-effects of the recession, and unemployment, especially among young people, was disturbingly high.

So, although the Bank of Canada did face a dilemma, the Bank of England faced one that was much worse, because the inflation rate had risen more than in Canada. Let’s take a closer look at what happened in Britain. Opinion on what the Bank of England should do was sharply divided. The Bank of England faced “a genuine problem of credibility,” declared Patrick Minford, a professor at Cardiff University, who urged the Bank of England to fight inflation by raising interest rates. The rise in inflation reflected temporary factors and would soon reverse course, countered Adam Posen, a member of the Bank of England’s Policy Committee, who argued that any tightening would risk putting Britain into a prolonged slump.

Whoever was right, the dispute highlighted the key concerns of macroeconomic policy. Unemployment and inflation are the two great evils of macroeconomics. So the two principal goals of macroeconomic policy are low unemployment and price stability, usually defined as a low but positive rate of inflation. Unfortunately, those goals sometimes appear to be in conflict with each other: economists often warn that policies intended to fight unemployment run the risk of increasing inflation; conversely, policies intended to bring down inflation can raise unemployment.

The nature of the trade-off between low unemployment and low inflation, along with the policy dilemma it creates, is a topic reserved for later chapters. This chapter provides an overview of the basic facts about unemployment and inflation: how they’re measured, how they affect consumers and firms, and how they change over time.