Inflation, Interest Rates and Central Banks: What the Fed Has to Do With Your Job

By Thorsten Meyer | November 15, 2026 | ThorstenMeyerAI.com

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Work After Work · Episode 13 · Arc 2: The basics everyone needs

Washington, Saturday evening, 6 October 1979. Reporters rush to the Federal Reserve’s Eccles Building for something rare: a press conference, called at short notice, after an unscheduled meeting of the Federal Open Market Committee earlier that day. American consumer prices are 12% higher than a year before. The new chairman, Paul Volcker, announces that the Fed will now go after inflation with everything it has.

A year later, the key interest rate is around 20%. Three years later, 10.8% of American workers are unemployed, more than one in ten.

This is a double episode. Last time, we looked at capital versus labour. Today: inflation, interest rates and central banks, and the question in the title. What does the Fed have to do with your job? More than most people think. The central bank’s brake works through the labour market.

Key takeaways

• Inflation is a general rise in prices. A US shopping basket that cost $1 in 1913 cost about $34 in September 2026, according to the consumer price index.
• Central banks fight it with one main tool: the short-term interest rate. Raising it makes loans more expensive, cools spending and hiring, and slows prices.
• The Volcker cure worked, at a price. US inflation fell from 14.8% (March 1980) to about 2.5% (July 1983). Unemployment peaked at 10.8% in late 1982.
• The number to remember is 2%. The Fed, the European Central Bank and the Bank of Japan all aim for it. Not zero, on purpose.
• Inflation is back in 2026. An energy shock pushed US inflation to 3.7% (September) and euro area inflation to 4.0% (October). The Fed raised rates in September for the first time since 2023.

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What inflation is

Inflation means that prices in general keep rising, not just the price of one thing. To measure it, statisticians price a fixed basket of what households buy: food, rent, fuel, clothes, haircuts, doctor visits. In the United States, that is the consumer price index (CPI) of the Bureau of Labor Statistics. Its series starts in 1913, the year the Federal Reserve was founded.

The long view is sobering. The CPI averaged 9.9 points in 1913 (on today’s base) and stood at 336.9 in September 2026. In plain words: what cost $1 in 1913 cost about $34 in 2026. Most of that happened slowly, a few percent a year. That is the kind of inflation people barely notice until they compare prices with their grandparents’.

Germany, 1923: the extreme

Germany saw the other kind. When the First World War broke out in 1914, one US dollar cost 4.20 marks, according to the Deutsche Bundesbank. To pay for the war and its debts, the Reichsbank printed more and more money. In summer 1922 the currency went into free fall. By mid-November 1923, when a new currency, the Rentenmark, was introduced, the dollar stood at 4.2 trillion marks.

Savings in marks were wiped out. The Bundesbank notes that Germany’s entire war debt of 154 billion marks was worth just 15.4 pfennigs on the day the Rentenmark arrived. And, as a Bundesbank speech puts it, “it is often argued that the travails of hyperinflation have been burnt into the collective memory of the German people”. It is one reason why Europe’s central bankers guard prices so closely to this day.

Why prices rise

Economists usually name three main drivers. This is textbook territory, simplified:

• Demand: too much money chasing too few goods. When people and governments want to buy more than the economy can produce, prices rise.
• Costs: when oil, gas, electricity or wages jump, firms pass part of it on.
• Expectations: if everyone expects higher prices, workers ask for bigger raises and firms raise prices in advance. That is the wage-price spiral.

The 1970s had all three. So does any serious inflation episode.

The central bank’s brake

The Federal Reserve Act was signed on 23 December 1913. Today the Fed’s main tool is a short-term interest rate, the federal funds rate: what banks charge each other for overnight loans. Think of it as the price of money. The European Central Bank steers its deposit facility rate, the Bank of Japan the overnight call rate.

Raise that price, and the chain reaction goes like this:

• Loans for houses, cars and machines get more expensive.
• People and firms spend less and invest less.
• Firms hire less.
• Demand cools, and price increases slow.

Cut it, and the chain runs the other way. Notice where the brake works: through jobs. A central bank cannot lower the price of oil. It can lower demand, and demand is made by people with jobs.

The menu that failed

In 1958, the economist A. W. Phillips published a study of British data from 1861 to 1957: when unemployment was low, money wages rose fast; when it was high, they rose slowly. Many policymakers read the “Phillips curve” as a menu. A little more inflation, a little less unemployment.

As the Federal Reserve’s own history of the period puts it, the idea that permanently lower unemployment could be “bought” with modestly higher inflation was a critical and erroneous assumption. In 1967 and 1968, Edmund Phelps and Milton Friedman argued that the trade-off fades once people expect inflation. Then came the energy crises: an Arab oil embargo from October 1973 that quadrupled crude prices, and a second oil shock around the Iranian revolution in 1979. By March 1980, US consumer prices were up 14.8% on the year.

The Volcker cure

So Volcker hit the brake hard. Under the new approach, the federal funds rate reached a record of around 20% in late 1980, according to Federal Reserve History. In the Fed’s own data, the effective rate averaged 19.1% in June 1981 and touched 22.4% on single days.

The economy fell into a deep recession. US unemployment peaked at 10.8% in November and December 1982. And inflation fell: CPI inflation was down to about 2.5% by July 1983. The cure worked. Workers paid for it with their jobs.

One tool, two mandates

By then, Congress had already written the Fed’s goals into law. The Federal Reserve Reform Act of 1977 directs it to promote “maximum employment, stable prices, and moderate long-term interest rates”. Because the third goal usually follows from the second, this is known as the dual mandate: jobs and prices.

The European Central Bank, founded in 1998, has a different job description. Under the EU treaty (Article 127), its primary objective is price stability. Different mandates, same main tool.

The number to remember: 2%

That’s the number to remember: two percent. The Fed wrote it down in 2012, in its first Statement on Longer-Run Goals, measured by the price index for personal consumption expenditures. The ECB aims for 2% over the medium term and, since its 2021 strategy review, treats it as symmetric: too low is as bad as too high. The Bank of Japan has a 2% price stability target too.

Why not zero? The ECB’s strategy statement gives the reasons. An inflation buffer above zero “provides monetary policy with space for interest rate cuts in the event of adverse developments and a safety margin against the risk of deflation”. Falling prices sound nice, but they can freeze an economy: people postpone purchases, debts weigh more, and firms cut wages or jobs. The ECB also names measurement bias and the fact that wages rarely fall in nominal terms.

2022: the surge

Then came 2022. Economies reopened after the pandemic, supply chains were broken, and Russia’s invasion of Ukraine set off an energy shock. US consumer price inflation hit 9.1% in June 2022. In the euro area, it peaked at 10.6% in October 2022 (Germany: 11.6%, harmonised measure).

The central banks then moved fast. The Fed raised its target range from 0-0.25% in March 2022 to 5.25-5.50% in July 2023. The ECB moved its deposit rate from -0.5% to 4.0% by September 2023.

Myth check: “When the central bank raises rates, people lose their jobs”

Verdict: partly true.

• Sometimes, painfully. The Volcker years pushed US unemployment to 10.8%.
• Not this time, at least not at first. While the Fed raised rates from March 2022 to July 2023, US unemployment stayed between 3.4% and 3.7%.
• What fell were job openings. According to the BLS job openings survey (JOLTS), openings dropped from a peak of 12.3 million in March 2022 to about 7.5 million in April 2024. Unemployment only drifted up to 3.9% by then.

Our reading: this time, the brake hit hiring more than jobs. For people who already had a job, little changed. For people looking for one, a lot did.

2026: it’s back

And now inflation is back. A conflict in the Middle East pushed energy prices up again this year. The European Central Bank’s latest statement speaks of an “energy shock”; euro area energy inflation reached 18.9% in September.

• USA: consumer prices up 3.7% on the year in September 2026, the latest yearly rate available (from 2.4% in January). For October, the BLS published no yearly rate, because last year’s government shutdown kept it from collecting enough price data in October 2025; prices rose 0.4% from September (seasonally adjusted).
• Euro area: 4.0% in October 2026 (flash estimate), up from 1.7% in January. Germany: 2.8%.
• China: the opposite problem. Consumer prices rose just 0.9% in September.

The central banks are moving again. On 16 September 2026, the Fed raised its target range by a quarter point to 3.75-4.00%, its first increase since 2023, “in support of the Federal Reserve’s dual mandate”. On 28 October it held, with two members voting for another hike. The ECB raised its deposit rate in June and September to 2.5% and held on 29 October. In Japan, after eight years of negative rates that ended in March 2024, the Bank of Japan raised its key rate to around 1.25% in September.

And AI?

Here is a twist few people expected. For now, AI is pushing some prices up, not down.

• In China, data storage devices cost 46.7% more in September 2026 than a year earlier, tablets 23.6% and computers 21.8%, according to the National Bureau of Statistics, which points to higher costs. Storage is one of the core hardware components of AI data centres, alongside compute and networking, as the ECB’s Lane notes; we looked at the memory bottleneck in our piece on Altman’s meeting with Samsung.
• At the ECB, board member Philip R. Lane said on 30 October that “AI-related price increases have contributed materially to the upward shift in goods inflation”. The effect on overall inflation is limited, he added, because AI-exposed goods make up only 3.4% of the euro area basket.
• The Fed’s statements of September and October say: “Productivity growth is strong, and capital investment is robust.”

So AI shows up in the central banks’ reasoning on both sides: as a source of demand and higher prices today, and as a possible source of productivity, and lower costs, tomorrow.

What it means for businesses

• Every rate decision changes your cost of capital. Data centres, robots and AI projects run largely on borrowed money; we traced that money in who pays for the AI data center boom. A higher rate means each project has to earn more to be worth it.
• Plan for energy, not just for wages. The 2022 and 2026 shocks both started with energy.
• Expect inflation in wage talks. When prices rise, employees will ask for compensation. Price it in early.

What it means for you

• Check your real wage. A 3% raise with 4% inflation is a pay cut. What counts is your raise minus inflation.
• Watch job openings, not just the unemployment rate. When rates rise, hiring usually slows before layoffs come. If you plan to switch jobs, the window can close before the headlines turn.
• Know your interest rates. Variable-rate loans and credit cards move with the central bank, usually quickly.

Thorsten’s thesis: what inflation says about it

My thesis for this season is that automation could become its own sector, up to 90% of the economy within a decade or a few decades. That is my thesis, not a fact, and this season tests it with evidence for and against.

Today’s evidence cuts both ways. For it: when machines make things cheaper, they push prices down, and central banks gain room to keep rates low. Against it, at least for now: the AI build-out is pushing some prices up, from memory chips to computers, and it depends on cheap money. When the price of money rises, so does the price of every robot and every data centre.

And one open question. The Fed’s mandate says “maximum employment”. In an economy run largely by machines, maximum employment of whom? Episode 47 will test the thesis in full.

Limits of this episode

• Different measures. US figures here use the CPI; the Fed targets a different index (PCE), which usually runs a little lower. Euro area and German figures use the harmonised index (HICP); Germany’s national CPI differs slightly.
• Latest data. US CPI for October 2026 was not yet published when this was written; the September figure is the latest used. The euro area October figure is a flash estimate.
• Rates. The 1981 figure is a monthly average of the effective federal funds rate; daily and target values were higher.
• Causes. The three drivers of inflation and the chain from rates to jobs are simplified textbook descriptions. “The brake hit hiring more than jobs” is my reading of the BLS data, not a finding of the Fed.
• Interpretations. The lessons for businesses and for you and the twist on my thesis are my reading.

Series navigation

• Previous episode: Episode 12, Capital vs. Labour: Who Gets the Pie.
• Next episode (tomorrow): Episode 14, Unemployment: Frictional, Structural, Technological. In 1930, John Maynard Keynes warned of “a new disease”: technological unemployment. Was he right?

Sources

• Federal Reserve History, “Volcker’s Announcement of Anti-Inflation Measures” (October 1979). federalreservehistory.org · “The Great Inflation”. federalreservehistory.org
• Federal Reserve History, “Federal Reserve Act Signed into Law” (23 December 1913). federalreservehistory.org · “Federal Reserve Reform Act of 1977”. federalreservehistory.org
• US Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers, all items, not seasonally adjusted (CUUR0000SA0). bls.gov · Unemployment rate (LNS14000000). bls.gov · Job Openings and Labor Turnover Survey, job openings (JTS000000000000000JOL). bls.gov
• Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, effective federal funds rate. federalreserve.gov · Open market operations, target rate history. federalreserve.gov
• FOMC statements of 16 September 2026 and 28 October 2026. federalreserve.gov · federalreserve.gov · Statement on Longer-Run Goals, reaffirmed 27 January 2026. federalreserve.gov · FAQ, “Why does the Federal Reserve aim for inflation of 2 percent over the longer run?”. federalreserve.gov
• A. W. Phillips, “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957”, Economica 25(100), November 1958. doi.org
• Deutsche Bundesbank, welcome remarks (exchange rate of the mark 1914 and 1923). bundesbank.de · “Inflation: lessons learnt from history”. bundesbank.de
• European Central Bank, monetary policy strategy statement (2021). ecb.europa.eu · Treaty on the Functioning of the European Union, Article 127. eur-lex.europa.eu
• European Central Bank, monetary policy decisions and monetary policy statement, 29 October 2026. ecb.europa.eu · ecb.europa.eu · Deposit facility rate (ECB Data Portal). data.ecb.europa.eu
• Philip R. Lane, “AI adoption in Europe”, keynote at the Federal Reserve Bank of San Francisco, 30 October 2026. ecb.europa.eu
• Eurostat, Harmonised index of consumer prices, monthly data (prc_hicp_minr), annual rates incl. flash estimate October 2026. ec.europa.eu
• Bank of Japan, “Changes in the Monetary Policy Framework” (19 March 2024). boj.or.jp (PDF) · “Change in the Guideline for Money Market Operations” (18 September 2026). boj.or.jp (PDF) · “Introduction of QQE with a Negative Interest Rate” (29 January 2016). boj.or.jp (PDF)
• National Bureau of Statistics of China, “Consumer Price Index in September 2026” (15 October 2026). stats.gov.cn · NBS commentary on the September CPI (14 October 2026, Chinese). stats.gov.cn
• John Maynard Keynes, “Economic Possibilities for our Grandchildren” (1930), quoted for the next episode.

This article is for information only. It is not career, legal, financial or investment advice.

Researched and drafted with AI assistance, including Anthropic’s Claude.