Journal Article

Is inflation dead?

Abstract: In the past few years the United States has enjoyed the unique economic duet of very low unemployment and declining price inflation. For decades, we have come to associate tight labor markets with accelerating wages and prices. But in 1997, the unemployment rate sank below 5 percent, and neither wage nor price inflation became a problem. Have our inflation processes fundamentally changed for the better? Are we in a new era of permanently better economic performance due to new behavior by our citizens? Or are we simply enjoying good luck in the form of positive supply shocks? A careful reading of the full inflation story reveals that nominal wage inflation has been subdued by exceptionally modest price inflation, according to the author. Real, or price-adjusted, wage inflation has been increasing in response to low unemployment, just as in past decades. Price inflation has been held down by a set of \"supply shocks,\" including a strong dollar, falling energy prices, and a cost-reducing regime shift in the healthcare industry. Inflation is not dead, and as supply shocks shift to neutral or worse, tight labor markets will create a traditional inflation problem.

Keywords: Inflation (Finance);

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: New England Economic Review

Publication Date: 1999

Issue: Jan

Pages: 37-49