TEXT OF STORY

SCOTT JAGOW: We try to explain the economy on this program as plainly as possible, but let me tell ya, it’s not always simple. And today, we have proof of that. A professor from Columbia University won the Nobel Prize in economics for better explaining something we learned in Econ 101. More now from Scott Tong.

SCOTT TONG: Why do prices go up, you know, inflation?

Well before Edmund Phelps, policymakers and forecasters figured it was relatively simple. It was all tied to how many people have jobs. When more people are employed, they make more, they buy more and bingo: inflation.

Phelps works suggests it’s more complicated. It also matters what people expect. If they think prices are going up, they’ll buy now instead of later.

Robert Dunn teaches economics at George Washington University.

ROBERT DUNN: Let’s say I have oil heat in my house and a big tank under the lawn. If I think inflation is going to get worse over the summer, I’ll carry that tank full and I’ll buy a lot of oil in May. But if I think inflation is not going to be bad I won’t worry about it and I won’t buy all the oil in April or May.

Phelps has also contributed to what we know about the unemployment rate.

As the theory goes, policymakers like the Fed can’t push it down too far. In the long run, it’ll just bob back up to what’s known as its natural rate.

In Washington, I’m Scott Tong for Marketplace.