These forces, which are partly external and partly domestic, have masked the relationship between economic slack and inflation, and have been reinforced by a weakening of inflation expectations. 2 1/5  BIS central bankers' speeches  Forces slowing down inflation in the euro area economy2 The euro area recovery has been characterised by a disconnect between economic activity and inflation – which some have referred to as a “missing inflation puzzle”. This disconnect becomes visible, for instance, when comparing actual growth and inflation outcomes for 2016 with those anticipated in the ECB staff macroeconomic projections of March 2014. The real GDP growth rate, which stood at 1.7% in 2016, essentially confirmed the March 2014 projection. HICP inflation, by contrast, turned out to be more than 1 percentage point below the rate projected in March 2014; and measures of core inflation, which strip out the direct disinflationary impact of the collapse of commodity prices over this period, have remained at 0.9%, about half the rate projected earlier. This picture points to pronounced disinflationary forces that have confounded attempts to forecast the impact of improved economic conditions on inflation. Where do these forces come from? Do they pertain to cyclical influences that monetary policy can offset? Do they reflect broader structural shifts in the economy that the central bank is forced to watch as a bystander?
This strongly implies it is not the greater incidence of ideas-fuelled booms after 1750 that accounts for the growth inflexion. The explanation lies instead in the dramatic fall in both the probability and cost of GDP contractions. Recessions have occurred only 30% of the time since 1700 and only 17% of the time since 1900. During these periods, growth has averaged minus 2.2% per year since 1700 and minus 3.4% per year since 1900. Since 1750, recessions have become far less frequent and less painful. It is the avoidance of deep recessions that differentiates the Golden Era from its Malthusian predecessor. Where does this leave our story of growth? Well, the story that better fits the facts appears to be one in which the conveyor belt of ideas and innovation has been continuous over the centuries, causing lengthy if lumpy ideas-fuelled expansions. But whereas prior to the Industrial Revolution this conveyor belt was regularly halted by recessions, more recently these interruptions have been far fewer and less costly. Put differently, the real revolution in living standards after 1750 came about not exclusively, or perhaps even mainly, from the surge in ideas and technologies. Rather, it resulted from societies having found some means of avoiding the subsequent recessionary bullets. Prior to the Industrial Revolution, these killed expansions dead. After it, societies appear to have found some effective means of dodging them. A Second “i” on Growth  To understand growth, then, we need to explain why economies become less recession-prone after 1750.