Inflation surprises of both kinds. Why target 2%? Why not 8%? Productivity growth - why it is so vital.

Inflation comes in higher than expected in the U.S. Markets push interest rate cuts further into the future.

Inflation comes in lower than expected in the U.K. Markets think the Bank of England has a green light to cut soon.

This might come as a surprise: nobody is quite sure what causes inflation. Central bank models assume the link between interest rates and inflation is via the labour market - wages. But inflation has come down, as interest rates have gone up, without any connection with the labour market - economies are running with very tight jobs markets. Go figure. Somebody needs to work out what the inflation process is, since central banks appear to be looking in the wrong place.

Why is the inflation target 2%? Any science behind this number?

The magic and mystery that is productivity growth. It’s not been around for very long. Everybody wants some but nobody is quite sure how to deliver it.

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