On the first issue, the persistence of low inflation during the 2010s, despite the extensive liquidity created by central banks, may seem at odds with Milton Friedman’s famous quote that “inflation is always and everywhere a monetary phenomenon”.
As a result, the relationship between economic activity and prices had become such that even when the output gap is zero – when the economy is in a normal state – inflation is about 0 percent. Under these circumstances, the view that prices will decline or not rise had become firmly entrenched among firms and households.