From Inflation to More Inflation, Disinflation, and Low Inflation
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Abstract
Volume 2 of A History of the Federal Reserve (forthcoming) covers the years of inflation and disinflation, followed by a return to relatively low inflation. It addresses four questions: Why did inflation start? Why did it continue for 15 or more years, from 1965 to about 1982? Why did it end? Why did it not return? As we look back to the 1950s and 1960s, two of the many changes in the Federal Reserve System affecting inflation deserve comment. First, in the 1950s, the goal was price stability and zero reported inflation, not inflation of about 2 percent. The 1959-1960 disinflation brought reported consumer price index (CPI) inflation, measured as a 12-month moving average, to less than 1 percent from March through August 1959. This measure, again, was below 1 percent through most of 1961 and it did not reach 2 percent until early 1966. Properly measured and adjusted for biases in the price index, the true price level probably declined modestly during this period. This period of deflation was also a period of sustained economic growth. It, and several periods of deflation discussed in volume 1 of A History of the Federal Reserve (2003), show no evidence of the liquidity trap that absorbed much recent attention in the United States and Japan. A second major change is the role of economists and economic research at the Federal Reserve Board and in the Federal Reserve banks. In the 1950s, the Board had no economists as members and there were few economists as