Abstract
The paper discusses the evolution of the U.S. inflation in the near and medium terms bases on historic inflation trends in the U.S. and countries that have experienced inflation in the past. Findings from the research attempts to evaluate the view that stable long-term inflation expectations and downward rigidity in wages provide adequate cushion to prices to evade further declines in inflation.
Introduction
The aim of the article is to evaluate the view that past and recent inflation trends can help predict future changes to inflation. The authors of the article take a case study of the United States by comparing historic inflation decline since early 1960s. The authors analyze the case by presenting a set of questions to guide the study. The research aims to explore if recession can drive American inflation toward or below zero and whether the U.S. is headed towards the Japanese style characterized by periods of protraction despite modest inflation. The main challenge to answering the research question is that the U.S. has not experienced periods of very low inflation rates. The research draws from past research in the field for the last 20 years, which indicates the credibility of the study. However, these research shows that the inflation rates fell from an annual rate significantly above 2% to an annual average of about 2% from the late 1900s to the mid 2000s. The major concern of this paper is on the behavior of inflation when it drops below 2%, and the data available for this range is quiet limited.
Findings from the study show that the dynamics of the U.S. inflation almost matches the inflation experienced by the Japanese after the 1990s. The research results suggest that there are no obvious downward rigidity despite evidence from past research indicating downward rigidity in individual wages. The results from this study can inform policy makers when making economic decisions. The authors fail to find a good point of reference for the study question because they only consider Japanese inflation trends. They also assume that inflation must fall at some time but fails to determine those periods. The authors also fail to explain how wage rigidities can help evade inflation. However, the authors conclude that inflation is risk that policy makers in the U.S. must give serious attention.
In conclusion, the authors clearly define and answer the question presented in the research. They use micro-level data on wages to determine if they have any significant impact in offsetting deflationary pressures. They conclude that downward nominal wage rigidity does not affect inflation. The article sets stage for more research in the dynamics of inflation and the implications it has on the U.S.
Work Cited:
Fuhrer, Jeffrey C. (2011) “Survey-Based Inflation Forecasts.” Paper prepared for a con-ference in honor of Ben Friedman, April 22–23, Federal Reserve Bank of Boston.
http://bostonfed.org/economic/conf/monetary-fiscal-topics-2011/papers/fuhrer.pdf.
Fuhrer, Jeffrey C., Giovanni P. Olivei, and Geoffrey M. B. Tootell. "Inflation Dynamics When Inflation Is Near Zero." Journal Of Money, Credit, And Banking 44.(2012): 83-122. EconLit with Full Text. Web. 24 Feb. 2013
Gottschalk, Peter. (2004) “Downward Nominal Wage Flexibility: Real or Measurement Error?”
IZA Discussion Paper No. 1327.
Nunes, Ricardo. (2010) “Inflation Dynamics: The Role of Expectations.”Journal of Money,
Credit and Banking, 42, 1161–72.
