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BPEA Article

Prices in 1970: The Horizontal Phillips Curve?

Abstract

ECONOMISTS OF ALL PERSUASIONS, monetarists and fiscalists alike, have been surprised by the stubborn refusal of the U.S. rate of inflation to decelerate during 1970. If the beginning of the present recession is dated from the peak of industrial production in the third quarter of 1969, four quarters of recession have now passed without any decline in the rate of advance of the nonfarm private deflator (NPD). There is no historical precedent for this, since the rate of increase of the NPD had fallen from 5.9 percent in the last four expansion quarters to -1.2 percent in the first four recession quarters in 1948-49, from 1.8 to 1.3 percent in 1953-54, from 3.6 to 1.3 percent in 1957-58, and from 1.5 to 1.1 percent in 1960-61. In contrast, the same pair of figures for 1969-70 is 4.3 and 4.7 percent, so the rate of inflation has actually increased slightly. The significant rise in unemployment in 1970, accompanied by a virtually unchanged rate of inflation, contrasts with the inverse relation between inflation and unemployment—known as the Phillips curve—that is usually assumed by economists, including the administration game-plan strategists.

The first section of this report examines disaggregated evidence to determine whether the peculiar behavior of aggregate prices has been widespread or confined to specific misbehaving sectors. The second section evaluates the recent forecasting record of the price equation for the NPD presented in these pages last spring.

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