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Overinflated peacetime inflation threat

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Snapshot for March 8, 2000

Overinflated peacetime inflation threat

The inflationary threat against which Alan Greenspan and the Federal Reserve purport to protect us is a scenario in which rising demand in a peacetime economy bursts through the limits of capacity to set off a wage-price spiral that compels the government to bring it down by engineering a recession. But, in fact, since 1914, when the U.S. began to measure consumer prices with a comprehensive index, a demand-driven peacetime economic boom has never generated the kind of inflation with which Greenspan frightens policy makers and the public.

The figure below shows the history of consumer price changes year-by-year since 1914. The first two bouts of inflation were the products of World Wars I and II. The inflation episode of the 1950s was fueled by the Korean War, and the culprit in the 1960s was Lyndon Johnson’s refusal to raise taxes to pay for the Vietnam War. The inflation of the 1970s was not a result of an overheated economy but was generated by world oil and grain price shocks, and the brief price spike in 1990 was a result of a sharp, short run-up in oil prices during the Gulf War.

In other words, the memories of inflation that give political support to Greenspan’s policy of raising interest rates reflect past experiences that are irrelevant to the present condition of the American economy.

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