Inflation in the American Economy

After some years of near stability in the 1950s and early to mid 1960s, prices began to increase in the later 1960s. By the end of the 1970s, prices were increasing by ten percent or more each year. For consumers, it seemed that every trip to the grocery store meant paying more for the same products. Wage and salary increases were eaten up by these higher prices; families' real income, in terms of what they could afford to buy, often went down even as dollar income went up. People found themselves pushed into higher tax brackets, though they were no better off, and for unskilled workers, the real value of the minimum wage dropped by a third.

In addition to this frustrating individual impact on ordinary families, inflation put pressures on the American economy as a whole. Investment was shifted from the production of good and services to such things as purchasing real estate, which was believed to be a hedge against inflation. News of vigorous economi

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d Reagan's first year, the CPI rose by 39.3 percent -- that, is, prices increased by two-fifths in the course of just those three years. This, as noted, is nearly as much as prices increased in the 12 years from 1983 through 1994 inclusive. Moreover, the reduction in inflation from the early 1980s on may have been even more dramatic than appears from the above figure. The CPI has recently come under considerable criticism for overstating rates of inflation in general (Kristof, 1996). If this overstatement were consistent from year to year, the relative rates of inflation in different years would remain unaffected; there simply would have been somewhat less inflation overall. However, the CPI is computed based on a "market basket" of goods, as bought by a typical consumer--and that market basket was defined in terms of consumers' buying patterns as measured in the period 1982-1984. Thus, to take one example, relatively few people were buying personal computers in the early 1980s. Computers are much more widely purchased today, they are cheaper, and they are vastly more powerful than those of more than a decade ago. The reduced price and greater purchasing of computers is counter-inflationary, in that people are spending
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Approximate Word count = 2104
Approximate Pages = 8 (250 words per page)

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