Speech

Flation withRobertH.Rasche InternationalMassRetailAssociation(IMRA) Scottsdale,Arizona January21,2002 PublishedintheFederalReserveBankofSt.LouisReview,November/December2002,84(6),pp.1-6 “Flation”—not inflation, not deflation— Thepurposeofthisanalysisisnottogetinto is liftedfromthetitleofabookbyAbba adiscussionofwhetheralittledeflationiscom- P. Lerner.1 For the past 35 years in the patiblewithprosperity,althoughwithinlimitsit United States and, indeed, in most of maybe.Themoreimportantpointisthat,with- theworld,policymakersandthepublicingeneral outquestion,substantialdeflationisinconsistent have been focused on the issue of inflation— withprosperity.Thus,deflationiseverybitas that is, the continual upward drift in prices of seriousanissueasinflation;however,theU.S. the overwhelming fraction of goods and services economytodaydoesnotrunanysignificantrisk produced in the economy. Sometimes the drift ofdeflation. was more of a gallop. For most of this period, Obviously,noteveryoneagreeswiththis the upward trend was also characteristic of the judgment.Basedonafewrecentobservationsof pricesofassetssuchasland,houses,andequities. month-to-monthpricechanges,somecommenta- Inflation, prevalent though it has been in our recent economic experience, has not been the torshaveusedthe“D”wordtoexpresstheircon- normformostofU.S.history.Intheearly1930s, cernaboutthecurrentstateoftheU.S.economy. exactly the opposite experience occurred: defla- Theobjectiveinthispaperistoexplorethissub- tion, or a continual downward drift in the prices jectand,wehope,makeacontributiontopublic of goods, services, and assets. understandingoftheissue. Deflationhasafrighteninghistory.Simultan- First,wewillelaborateonwhatwebelieveis eouslywiththedeflationoftheearly1930s,the theappropriateobjectiveforFederalReserve U.S.unemploymentratesoaredtoabout25per- policy.Second,wewillexplainthegenerally centin1933atthedepthoftheGreatDepression. accepteddefinitionsofinflationanddeflation, Althoughdeflationendedin1933,thedamageto anddiscussthefundamentalsourcesofthese theeconomywassogreatthatpooreconomic phenomena.Third,wewillreviewaspectsof conditionspersisteduntiltheUnitedStates pricebehaviorinoureconomyanddiscusshow becameinvolvedinWorldWarIIin1941.More- datashouldbeinterpretedtodeterminetheinfla- over,theeconomichistoryofthe1990sinJapan tionaryordeflationarystateoftheeconomy. ischaracterizedbydeflation.TheJapaneseecon- omyhasstagnated,andunemploymenttherehas Finally,althoughtheissueconcernsthebehavior risentodaytolevelsnotseeninover40years. oftheaggregatepricelevel,wewillexamine Fromtheseandotherepisodesaroundtheworld, someparticularsectoralpricechangestohelp manypeopleassociatedeflationwith“hardtimes.” betterunderstandtheaggregatepricelevel. 1 Lerner,AbbaP.Flation.NewYork:QuadrangleBooks,1972. 1 MONETARYPOLICYANDINFLATION THE APPROPRIATE POLICY THE DEFINITION AND SOURCES OBJECTIVE FOR THE FEDERAL OF INFLATION AND DEFLATION RESERVE Atthebeginningofthegreatinflationof Ourmonetarypolicyframeworkisthis.First 1965-80,therewasawidedisparityofprofessional andforemost,thecentralbankmustmaintaina opinionaboutthefundamentalsourceofinflation commitmenttopricestability.Anoperational ordeflationinaneconomy.Onepropositioncame definitionofpricestabilityisanenvironmentin tobeknownasthe“monetaristview.”Thisview whichtheinflationrate,properlymeasuredand heldthatsustainedinflationordeflationwas averagedoverseveralyears,iszero.Allofour alwaysamonetaryphenomenon;thatis,thatthe inflationdataaresubjecttomeasurementerrors. onlysourceoflong-runpositiveornegativetrends Expertsinsuchmeasurementsgenerallyagree inthegenerallevelofpricesinaneconomyisthe thatcurrentpriceindexes,despitestatisticians’ creationofanexcessorinsufficientsupplyof bestefforts,stillleaveinflationmeasuresthathave moneybalancesrelativetothegrowthofthepro- someupwardbias.Hence,intermsofthevarious ductivecapacityofthateconomy.MiltonFriedman inflationindexes,wecansaythatpricestability oftheUniversityofChicagowasthemostpublicly prevailswhenbroadpriceindexesexhibitsmall visibleproponentofthisproposition.TheFederal positiveaveragevaluesformeasuredinflation ReserveBankofSt.Louis,inparticularthepresi- andthatyear-to-yearfluctuationsaroundthat dentoftheBankatthattime,DarrylFrancis,and averagearewellcontained. theResearchstaffwerevocaladvocatesofthis Ifthepricelevelcomesunstuck,yielding propositioninthepolicyarenaduringthelate inflationordeflation,allsortsofotherproblems 1960sandearly1970s.AreadingoftheMemoran- willarise.Nevertheless,withintheconfinesof dumofDiscussionoftheFederalOpenMarket thegoalofpricestability,thecentralbankhas Committee(FOMC)forthisperiodmakesclear someflexibilitytoleanagainstfluctuationsin thatthereweresharpdebatesovertheseissues. outputandemployment.However,thecentral TheFOMCistheFed’smainmonetarypolicymak- bankoughtnottopursuethegoalofstabilizing ingbody,andthepublicrecordofthatperiod economicactivitysoaggressivelythatitrunsany showsthatDarrylFranciswasavigorousadvo- substantialriskofcompromisingthegoalofprice cateofthemonetaristview. stability. Thepropositionthatthecentralbankisthe Finally,inleaningagainstfluctuationsin sourceofongoinginflationordeflationwasa growthandemployment,thecentralbankought distinctminorityview35yearsago.IntheFOMC, nottohavegoalsforlevelsoftheeconomy’s DarrylFranciswasusuallytheonlyoneexpressing growthandunemploymentratesperse.Within thisview.Thedevelopmentofeconomictheory awiderange,nooneknowswhattheeconomy’s andtheeconomichistoryofthepastthreedecades equilibriumrateofgrowthisorwhatrateof haveproducedamajorchangeinbothprofessional unemploymentwillclearthelabormarketinthe thinkingandpublicattitudestowardthesources longrun.Thebiggestrisksofamajormonetary ofinflationanddeflation.Economistsarenow policymistakeoccurifacentralbankattempts largelyinagreementthatifthecentralbankdoes totargetthelevelsofrealvariables. notachievethegoalofpricestability,nooneelse Achievingtheobjectiveofpricestability,as can.Manycentralbanksaroundtheworld,starting definedabove,willyieldahighlystableeconomy. withtheReserveBankofNewZealandin1990, WhenthemarkethasconfidenceinFedpolicy, haveacknowledgedthisresponsibilityandhave short-runchanges—thatis,overafewmonthsor adoptedexplicitnumericinflationtargets. evenafewquarters—intherateofinflationor Thisviewalsospreadintopublicthinking deflationwilltendtobeself-reversingrather aboutinflationintheUnitedStates.PaulVolcker, thanself-reinforcing. formerchairmanoftheBoardofGovernorsof 2 Flation theFederalReserveSystem,iswidelycredited averagedonly1.1percent.Overthesameperiod, forthedisinflationthatoccurredintheUnited verylowinflationhasturnedintodeflation.From Statesintheearly1980s.ChairmanGreenspanis 1991to1996,theJapaneseconsumptiondeflator applaudedfortheadditionalprogressinthe1990s roseatanaverageannualrateofonly0.5percent; thatbroughttheU.S.inflationratetothelowest for1996to2000,theratewas–0.2percent.Asset levelinalmost40years. pricesfelldramatically.ThedeclineoftheNikkei TodaytheFederalReserveacceptsitsrespon- equitypriceindexfromavalueofcloseto40,000 sibilityforthetrendrateofinflation.However,a inlate1989toitsrecentleveloflessthan10,000 centralbankisnotresponsibleformonth-to- iscommonknowledge.Whatisnotaswellknown monthwigglesintheinflationstatistics.Nor outsideJapanisthatlandandrealestateprices shouldacentralbankattempttoreacttoshort-run overthepastdecadehaveexperiencedequally variations,sincethesourcesofsuchnoiseare dramaticdeclinesasthoseseeninequitymarkets. beyonditscontrolandlikelytoaverageoutover InApril1993anindexofhousingpricesinJapan aperiodofafewmonthsoratmostacoupleof stoodat42.35millionyen.ByApril2001ithad years.Oneobviousreasonfornotreactingtoshort- fallento36.52millionyen,anannualaveragerate rundevelopmentsisthatanunknownpartof ofdeclineof1.7percent.2Theindexofresidential thesechangesinthereportedinflationrateis purelymeasurementerror,orstatisticalnoise. landpricesreachedapeakinMarch1991of109.7 Professionalopinionhasalsochangedabout andfellto81.7bySeptember2001,anannual thesourceofdeflationinthe1930s.Itisnow averagerateofdeclineof2.4percent.Thedecline widelyacknowledgedthat,ataminimum,the incommerciallandpriceswasevenlarger.From intensityoftheGreatDepressionwasmagnified apeakof111.7inSeptember1991,theindexof bythefailureoftheFederalReservetoprovide thesepricesfellto49.1inSeptember2001,an sufficientliquiditytotheeconomyinthefaceof annualaveragerateofdeclineof5.6percent.3In widespreadbankfailures.TheFederalReserve termsoftheimpactonJapan’soutputandemploy- inturnhaslearnedfromthatexperience.When ment,thelargedeflationofassetpriceswasprob- theU.S.economyhasbeenthreatenedbyliquidity ablymoreimportantthanthegentledeflationof crisesinrecentyears—suchasthestockmarket goodsprices. crashof1987,theAsiancrisesandRussiandefault Whatisresponsiblefortheincrediblediffer- of1998,andtheterroristattackofSeptember11, enceintheperformanceoftheJapaneseeconomy 2001—theFedhasmovedrapidlytoinjectlarge betweenthe1980sand1990s?Japan’smoneystock amountsofliquidityintotheeconomy.Liquidity (usingJapan’sownpreferredmeasure,M2+CDs) criseshavebeenaverted,inflationhasremained grewatanaverageannualrateof7.9percentfrom lowandstable,anddeflationhasnotoccurred. 1981through1990,butonlyat2.3percentper Experienceelsewherehasnotbeenas yearoverthedecadefrom1991through2000.A benign.Overtheperiodfrom1981through1990, conclusionconsistentwithresearchonthisissue theJapaneseeconomygrewatanannualrateof isthattheongoingstagnationanddeflationthat 3.7percentandtheinflationrate(measuredby thegrossdomesticproduct[GDP]priceindex) theJapaneseeconomyhasexperiencedinthe averaged1.5percentperyear.Thesituationin pastdecadeislikelyrelatedtoaninsufficient Japaninthe1990shasbeenremarkablydifferent. supplyofliquiditybytheBankofJapan.Slow TheJapaneseeconomyhasstruggledinandout moneygrowthisnotthewholestory,butiscer- ofrecession,andrealgrowthfrom1991to2000 tainlyasignificantpartofit. 2 TheHousingLoanProgressAssociation.“PriceSurveyoftheHousingMarket.”<http://jin.jcic.or.jp/stat/stats/>. 2 NationalLandAgency. 3 MONETARYPOLICYANDINFLATION RECENT PRICE BEHAVIOR IN thatmeasuredbytheCPI.4Althoughthefollowing discussionwillreferprimarilytotheconsump- THE U.S. ECONOMY tionpriceindex,noimportantissuesdependon PublicdiscussionofinflationintheUnited whetherthefocusisonthatindexortheCPI. Statesgenerallyisfocusedontheconsumerprice Whatshouldweexpecttoobserveinan index(CPI)publishedmonthlybytheBureauof economywherepricestabilityprevails?Ifitwere LaborStatistics.Themonthlychangeintheover- possibletomeasuretheaveragelevelofprices allCPIistheso-called“headline”inflationnum- withlittleornobiasinsuchaneconomy,then ber.TheCPIisveryvisible;ithasbeenwidely overaperiodoftimeanaveragemeasuredinfla- reportedforyearsandisusedtoconstructcost- tionrateveryclosetozeroshouldbeobserved. of-livingadjustmentsinunionwagecontracts Frommonth-to-monthorquarter-to-quarter,posi- andSocialSecuritybenefits. tiveornegativechangesoftheinflationindex Sometimesreferenceisalsomadetoa“core” willoccur,butovertimethesewouldaverage inflationrate,usuallymeasuredbytheCPIexclud- outtoaboutzero. ingpricesoffoodandenergyproducts.Theration- Whataboutpricesofindividualgoodsand aleforexcludingfoodandenergypricesisthat servicesundersuchconditions?Therewould theycanbequitevolatile,andhencelonger-term likelybeadispersionofchangesinthepricesof inflationtrendscanbeobscuredwhentheyare individualgoodsandservicesaroundzero.In included. fact,pricesofsomegoodsandservicescouldbe Startingin2000,theFOMCchosetofocuson continuallyfalling,whilepricesofothergoods adifferentmeasureofinflation:changesinthe andservicescouldbecontinuallyrising.Itis priceindexforpersonalconsumptionexpendi- perfectlynormaltoexperiencedivergenttrends turesinthenationalincomeaccounts.Thismeas- ofindividualpricesunderconditionsofoverall ureofinflation,whichforconveniencewewill pricestability.Thus,trendsinthepricesofindi- callthe“consumptionpriceindex,”isreported vidualgoodsorservicescannotbeusedtojudge monthlybytheBureauofEconomicAnalysisof whetheraneconomyisexperiencinginflationor theDepartmentofCommerce.Althoughthisindex deflation. receiveslesspublicattentionthantheCPI,itis Animportantinfluenceoninflationdatain preferredbytheFOMCbecausethemethodology theUnitedStatesoverthepastthreeyearshas usedinitsconstructionreducesthemeasurement beenthebehaviorofenergypricesonworldmar- biasrelativetothatintheCPI;also,thecoverage kets.In1998,energypricescollapsedasworld ofgoodsandservicesinthisindexisbelievedto demanddroppeddramaticallyinresponsetothe betterrepresentconsumptionpatterns.Forexam- crisesinAsianeconomies.Petroleuminventories ple,pricesofmedicalservicesareincludedinthe roseunexpectedlyandmajorproducers,including CPIonlytotheextentthatsuchservicesarepaid OPECnations,cutproductiontostabilizeprices directlybyconsumers.Pricesofallmedicalserv- andadjustinventories.In1999and2000,energy icesareincludedintheconsumptionpriceindex pricesrosesharplyaseconomicactivityboomed whetherthoseservicesarepaidfordirectlyby intheUnitedStatesandothermajorindustrialized consumersorarepaidforonbehalfofconsumers economiesatatimewhenworldinventoriesof bythirdpartiessuchasinsurancecompanies. oilwereparticularlylow.Leadingupto2002, Inrecentyears,inflationasmeasuredbythe astheU.S.economysankintorecessionand consumptionpriceindexhasbeenlowerthan economicgrowthslowedinEurope,energy 4 InAugust2002theBureauofLaborStatisticsintroducedanewmeasureofconsumerprices—thechainedconsumerpriceindexforall urbanconsumers(C-CPI-U).MonthlydataareavailablefromDecember1999.Theobjectiveofthenewindexistoreducethesubstitution biasthatispresentintheCPI-U.BetweenDecember1999andDecember2000(theonlyperiodforwhichfinalestimatesoftheC-CPI-Uare available)theinflationratemeasuredbytheC-CPI-Udiffersfromthatmeasuredbytheconsumptionpriceindexbyonly0.1percent. 4 Flation demandgrowthslowedandenergypriceson beallocatedmostefficiently.Thedisparityamong worldmarketsfellagain. inflationratesforparticulargoodsandservices Theaverageinflationrateoverthefouryears overlongerperiodsoftimeissignificant.From 1994through1997was2.7percentperyearas 1980to2000,theoverallconsumptionpriceindex measuredbytheconsumptionpriceindex.The rose95percent.Considerpricebehaviorinahalf- averageinflationrateoverthefouryearsfrom dozencategorieswithinoverallpersonalconsump- 1998through2001was1.7percentperyear.The tionexpenditures.Pricesofpersonalcomputers coreinflationcomponentoftheconsumption andperipheralequipmentstandout:suchprices priceindexhasfallenfrom2.1percentinthe areestimatedtohavefallenby99percentsince earlierperiodto1.6percentinthelatterperiod. 1980.Notethatdespitethisdramaticpricedecline, Theconclusionfromtheseobservationsisthat peopledonottalkaboutthecomputerindustry therehasbeenasmallreductionintrendinflation, sufferingfromdeflation.Thisisagrowthindustry, whethermeasuredbythetotalorthecorecon- drivenbydramaticinnovationsandincreasesin sumptionpriceindex,overthepastfouryears. efficiency. Noestimatesofthebiasesintheindexareso Pricesofdurablegoodsareestimatedtohave largeastosuggestthatthetruerateofinflationis increasedby20percentsince1980,considerably nownegative—thatis,theU.S.economyisnotin slowerthanthegeneralinflationoverthisperiod. adeflationarysituation.What,then,istheorigin Pricesofnondurablesareestimatedtohave ofthe“deflationthreat”thathasbeenfeaturedin increasedby65percentsince1980;nondurable someeconomicandnewspapercommentaries? goodspriceshaverisenmorethandurablegoods Someofthesediscussionsappeartoconcentrate prices,butstillconsiderablylessthantheover- undulyonparticularpricesandonshort-run allrateofinflation.Pricesoffoodandbeverages datacollectedintheimmediateaftermathofthe areestimatedtohaveincreased79percentsince 1980,somewhatslowerthantheoverallrateof September11terroristattacks.Thechangeinthe inflation. priceindexforpersonalconsumptionexpendi- Considersomeexamplesattheotherextreme. turesforSeptember2001comparedwithAugust Since1980,pricesoftobaccoandsmokingprod- 2001wasreportedat–0.4percent.Thedeclineis uctsareestimatedtohaveincreased480percent attributabletofallingenergypricesandtoasta- andpricesofmedicalservicesby197percent.In tisticalartifactofthedecisionmadebytheBureau thetablesthatshowpricesbyvarioussectors, ofEconomicAnalysisinmeasuringinsurance widedifferencesinexperiencesuchasthose claimpaymentsasaresultoftheSeptember11 mentionedherecanbeseen. attacks.TheDecember2001consumptionprice Arefallingprices,orpricesthatincrease indexshowedadeclineof0.2percentforthe slowlyrelativetothegeneralrateofinflation, monthandledtofurtherpressspeculationabout indicativeof“hardtimes”forparticularindustries? deflation.Again,itisnecessarytoemphasize Sometimes,butcertainlynotalways.Consider thatafocusonveryshort-termmovementsin personalcomputersandconsumerelectronics thepriceindexescanleadtomisinterpretation ingeneral(thelatterisincludedinthedurable oftheunderlyingtrendsofinflationordeflation goodscomponentoftheconsumptionprice inaneconomy. index).Thesearegoodsthathavedemonstratively highincomeandpriceelasticities.Whatthat meansisthattheamountsconsumersbuyincrease CHANGES IN RELATIVE PRICES alotasincomesriseand/orpricesfall.Overtime, OneofthegreatstrengthsoftheU.S.economy asconsumerincomeshaveincreasedandprices isthatpricesofindividualgoodsandservices havefallen,thesizeofthemarketforthesehigh- fluctuatefreely.Thesepricechangesallowmar- elasticityproductshasincreaseddramatically. ketstosignalhowourproductiveresourcescan ColorTVs,camcorders,VCRs,DVDs,andper- 5 MONETARYPOLICYANDINFLATION sonalcomputers,tonameafewsuchproducts, cedures.Suchpricechangesreallyreflectsignifi- areallnowcommonhouseholditemsinthe cantqualityimprovements.Ideallysuchquality UnitedStates.Manyconsumerscanremember improvementswouldbeincorporatedintothe whentheseproductswereeitherunknownor measurementofastandardizedunitofmedical ownedbyrelativelyfewhouseholds. services.Withsomeconsumerdurables,suchas Thisisanimportantpoint:expansionofthe automobiles,statisticianshavebeenquitesuccess- marketsforcertainproductsoccurredsimultane- fulinmeasuringqualityimprovement.Inother ouslywithafallinprices.Pricedeflationfor areas,capturingqualitychangeintothemeasure- thesegoodswasnotinconsistentwithprosperity mentofastandardunitofoutputisdifficultif intheindustriesproducingthem.Indeed,declin- notimpossible. ingpriceswereessentialtoexpandingthese Asanexample,considerlaparoscopicsurgery markets.Thefallinpriceswastheresultofrapid toremovethegallbladder.Notthatlongago,gall productivityincreasesfrominnovationsinthe bladdersurgeryrequiredasubstantialperiodof productionoftheseitemsand/ortheircompo- hospitalization,duringwhichpatientactivity nents.Firmsfounditprofitabletocutpricesand levelsweresignificantlyrestricted.Today,with expandproduction.Workersintheseindustries laparoscopicsurgery,thelengthofthehospital foundtheirimprovedproductivityrewardedin stayismuchshorterandpatientdiscomfortmuch higherwages.Consumers,workers,andshare- less.Moreover,thepatientcanresumereasonably holdersallhavebenefited,eventhoughprices normalactivity,includinggoingtowork,aftera havefallensubstantiallyovertime. shortpostoperativeperiod.Thepatientand/ora High-demandelasticitiesareacriticalelement third-partypayermaypaythesurgeonsubstan- insuchsuccessstories.Incontrast,considermar- tiallymoretodaytoremovethegallbladderthan ketsforbasicagriculturalproductsintheUnited 35yearsago,butdoesthisincreasemeanthatthe States.ProductivityimprovementinU.S.agricul- priceproperlymeasuredisdramaticallyhigher? turalproductionovertheyearshasbeentremen- Awell-constructedpriceindexmightadjustfor dous.Pricesoftheseproductshavealsofallen thereductioninthepecuniarycostofconfine- relativetogoodsingeneraloverthelongrun. ment—fewerhospitaldays—fromtheimproved However,bothincomeandpriceelasticitiesfor technology.However,itisunlikelythatanyprice agriculturalproductsarerelativelylow.Hence, indexwouldreflecttheimprovedqualityofthe economicgrowthanddecliningpriceshavenot procedurerepresentedbythereducednonpecu- niarycostsofconfinementandtheshorterrecov- producedlargeincreasesinconsumption.Asa erytimenowavailable.Hencethereportedchange result,fewerandfewerworkershavebeenrequired inthepriceindexforsuchaprocedurecertainly overtimetoproducemorethanenoughoutput overstatesthetruerateofpricechange. tosatisfybothdomesticandforeigndemand. Farmshavegoneoutofbusiness,thenumberof peopleengagedinagriculturalproductionhas FLATION AND THE FED decreased,andinrecentyearsfarmincomehas beensustainedbylarge“emergency”farmappro- TheFed’sgoalistomaintainlowandsteady priationsoutofthefederalbudget.Becauseof inflation,sothatexpectationsofchangesininfla- thelowpriceandincomeelasticitiesforagricul- tiondonotenterimportantlyinthedecisions turalgoods,deflationinthisindustrymeanshard businessesandhouseholdsmake.Usingseveral timesformanyfarmers. differentmeasuresofinflationexpectations,it Healthcareprovidesareallyinterestingcase isclearthatlong-termexpectedinflationhas ofrelativepricechanges.Inpart,therapidrate changedlittleinrecentyears.Thereisnoevidence ofpriceincreasehererepresentsinnovationin thatchanginginflationexpectationsfigureimpor- theformofnewproductsand/orimprovedpro- tantlyineconomicdecisionsatthistime. 6 Flation Substantialvariabilityinpricesofindividual thesituationintheweeksfollowingtheterrorist goodsisconsistentwithstabilityintheoverall attacksofSeptember11,2001,whentheeconomic inflationrate.Thevariabilityservestoallocateand outlookwashighlyuncertain.Theautoindustry reallocateresourcesacrossdifferentsectorsofthe wassuccessfulinsellingarecordnumberofcars economy,accordingtochangesinconsumertastes inOctober2001throughpricecutsintheformof anddifferentialtrendsinproductivityadvance- zero-interestfinancing.Ifconsumershadreacted ment.Simplyput,itisnormalthatsomeindustries byexpectingevendeeperpricecutsandhad aregrowingwhileothersarecontracting. delayedpurchases,thesituationinearly2002 Acommonbusinessproblemistodetermine wouldhavebeenverydifferent.Overall,con- asuccessfulpricingstrategy.Oneaspectofpricing sumersviewpricecutsintoday’senvironment strategyisdirectlyrelevanttothisdiscussion. asabuyingopportunity,notasaforecastoffurther Whenafirmcutspricestostimulatesales,itmay pricecutstocome. notbesuccessfulifitscustomersbelievethateven Clearly,thestabilityintheoverallprice deeperpricecutsarearoundthecorner.Anexpec- environment—stabilityinlonger-runexpecta- tationoffallingpricesmay,temporarily,reduce tions—iswhatallowstemporarypricecutsto ratherthanincreasesales.Itisforthisreasonthat worktoboostsalesandisanimportantelement generalizeddeflationcanbesodangeroustothe instabilizingthegeneraleconomy.Thecurrent economy.Awidespreadexpectationoffalling U.S.situationdoesnotmatchcasesintheUnited pricesmayleadtodecliningdemandacrossmuch Statesandelsewherethathistoricallyhavebeen oftheeconomyaspeoplewaitforlowerpricesin associatedwithongoingdeflation.TheFederal thefuture.Decliningdemandmayforcelayoffs, Reservepursuedanexpansionarymonetarypolicy whichfurtherdepresshouseholdandbusiness throughout2001thathascontributedtorestoring confidence.Conversely,inflationexpectationscan equilibriumtotheU.S.economy.Whatpolicy leadtorisingdemandsandanticipatorybuying. actionswillbeappropriategoingforwardwill Manyanalystsseemtoviewlowinflation havetobedeterminedasevidencearrivesonthe andhighemploymentascompetinggoals.That strengthanddurabilityoftheeconomicexpansion. iscertainlynottheonlypossiblescenario.Main- Wemustbevigilant,buttodayitislikelythatwe taininglowandstableinflationcontributes enjoyflation—no“in”andno“de.” mightilytooveralleconomicstability.Consider 7

William Poole (2002, January 20). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20020121_poole

@misc{wtfs_speech_20020121_poole,
  author = {William Poole},
  title = {Speech},
  year = {2002},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20020121_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}