Economics Update (July-September 1998)

Low Inflation Is Key to Strong Economy

T he single most important element in the U.S. economy's stellar performance of the last eight years is low inflation, said Jack Guynn, president and chief executive officer of the Atlanta Fed, at a recent speech to the American Furniture Manufacturers Association.

Fiscal and Monetary Policies

In detailing the strong U.S. economic expansion, Guynn acknowledged the importance of some "old-fashioned good luck" in the form of positive oil price shocks, globalization of markets and technological developments. More important, though, were the economic policies — the monetary policies of the Fed and the fiscal policies implemented by Congress and the Bush and Clinton administrations — that produced the current low inflation environment, he said.

High inflation produces efficiency costs, Guynn explained. Efficiency costs usually present themselves as inflation avoidance activities, such as inventory building and labor contract shifting. By diverting resources away from production, these activities impose costs on companies and the economy as a whole.

According to Guynn, the general absence of efficiency costs has been key in the current expansion. "Workers don't have to guess what their wages will be worth next year; businesses don't have to guess what the cost of production will be; investors don't have to subtract the cost of inflation from expected returns; and consumers don't have to buy now before prices go up," he said. The fact that these inflation avoidance activities don't have to exist, however, "says a lot about why inflation is so pernicious: we tend not to take notice until it's much too late."

An Efficient Market Economy

While the vigilance of American policymakers toward inflation has occasionally waned, most recently in the 1970s, Guynn said it is significant that hyperinflation "has not been the American experience. . . . It ought to serve as a reminder that this country's longstanding concern about low inflation is well founded, not as an end in and of itself, but as a means of providing the best environment for the market economy to operate efficiently."

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