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Economic Review
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Since the early 1990s, a number of central banks have adopted numerical inflation targets as a guide for monetary policy. The targets are intended to help central banks achieve and maintain price stability by specifying an explicit goal for monetary policy based on a given time path for a particular measure of inflation. In some cases the targets are expressed as a range for inflation over time, while in other cases they are expressed as a path for the inflation rate itself. The measure of inflation that is targeted varies but is typically a broad measure of prices, such as a consumer or retail price index. At a conceptual level, adopting inflation targets may necessitate fundamental changes in the way monetary policy responds to economic conditions. For example, inflation targeting requires a highly forward-looking monetary policy. Given lags in the effects of monetary policy on inflation, central banks seeking to achieve a target for inflation need to forecast inflation and adjust policy in response to projected deviations of inflation from target. But central banks without an explicit inflation target may also be forward looking and equally focused on a long-run goal of price stability. Thus, at a practical level, adopting inflation targets may only formalize a strategy for policy that was already more or less in place. If so, targets might improve the transparency, accountability, and credibility of monetary policy but have little or no impact on the way policy instruments are adjusted to incoming information about the economy. Kahn and Parrish examine how central banks have changed their policy procedures after adopting explicit inflation targets. They conclude that, while inflation targets have perhaps improved the transparency, accountability, and credibility of monetary policy, it is difficult to discern any significant and systematic changes in the way policymakers adjust policy instruments to incoming information after adopting inflation targets. Back to top Economic Review home
The Federal Reserve has made significant progress toward price stability over the last two decades. The annual inflation rate has declined from 13 percent in the early 1980s to roughly 2 percent today. But, to be sure, the current low-inflation environment has come at a price. One key cost of achieving low inflation is the output loss that generally accompanies a permanent decline in inflation, as occurred in the early 1980s and early 1990s. Another more subtle output cost of fighting inflation is the cost of preventing inflation from rising. As incipient inflation pressures build, tighter monetary policy can slow the economy and thereby preemptively forestall the rise in actual inflation. The slower output growth is the cost of resisting inflation pressures. Together, these two output costs of fighting inflation play important roles in determining how best to maintain low inflation and how to seek further disinflation toward price stability. A significant factor determining the output cost of fighting inflation is the tradeoff between inflation and output, often referred to as the Phillips curve. Traditionally, estimates of this relationship assume the shape of this curve is linear. This implies that the slope of the Phillips curve is a constant and, therefore, independent of the stage of the business cycle, the speed of the disinflation, and how aggressively incipient inflation pressures are fought. Recent research, however, has begun to question whether the slope is constant. Assessing the output cost of fighting inflation may be more complicated than traditionally assumed. Filardo investigates the shape of the Phillips curve and the associated output cost of fighting inflation. He concludes that, while the Phillips curve traditionally has been thought of as approximately linear, closer examination of the inflation-output relationship reveals important nonlinearities. This new evidence and its implications for the output cost of fighting inflation may require new policy strategies. Back to top Economic Review home
Labor costs have recently come under scrutiny by policymakers, business economists, and financial market participants. The primary concern has been that tight labor markets might lead to faster compensation growth and, ultimately, to upward pressure on general inflation. The employment cost index (ECI) has received particularly close attention because many analysts consider it to be one of the best measures of labor cost inflation. Other analysts, however, have questioned whether the ECI and other labor cost measures are useful in inflation forecasting. One reason for doubting the ECI's inflation forecasting value is that a moderate upward trend in ECI growth over the last three years has, so far, not been matched by a rise in the general inflation rate. But economic analysts may have other reasons than inflation forecasting for using the ECI. Detailed information on employment cost trends may help analyze labor market developments and, indirectly, may reflect broader economic trends outside the labor market. In addition, companies may find the ECI useful in wage setting and other compensation decisions. Given the high profile that the index has sometimes assumed in the business press and financial markets, it is time to take a closer look at the ECI and evaluate its possible uses. Garner examines the ECI and other labor cost measures. He finds that the ECI is quite useful in analyzing broad economic trends, such as the shift in jobs toward the service sector, and in making business decisions about employee compensation. He concludes, however, that the ECI is more useful for labor market analysis and wage setting than for general inflation forecasting. Back to top Economic Review home
Throughout the 1990s, the pork industry has been at the forefront of a
revolution in the structure of the U.S. food and agricultural sector. In particular, the
pork industry has been rapidly moving away from its traditional structure built on
hundreds of thousands of small farms selling hogs at local terminal markets to a much more
concentrated "supply chain" model. Contracting is one prominent feature of
supply chains, and the share of pork production grown under contract or vertical
integration has jumped from a few percent in the early 1980s to around a third today. Most
analysts agree that the structure of the U.S. pork industry will soon resemble that of the
U.S. poultry industry, which moved to a supply chain structure more than three decades
ago. In short, the hog industry, once a quintessential "family farm" enterprise,
has gone to market---a very big market. |