Macro Policy Responses to Price Shocks
IN RECENT YEARS the standard view of the inflation process has become complicated by the realization that inflationary bursts can emanate from supply as well as from demand disturbances. Supply-side disturbances, reflected mainly in rising food and oil prices, generated sharp increases in general price levels in most countries of the world during the 1973-75 period. The impact in the United States was magnified by wage-price catch-ups after the ending of controls, the productivity slowdown, the decline in the dollar, and a number of legislative measures resulting in higher costs and prices. More recently, the decline of oil production in Iran and rising farm prices are kindling fears of new supply-shock inflation.