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Price stability was not literally achieved in 1998, as many measures of
the price level continued to rise, and inflation expectations were well above zero. Yet in
1998, consumer prices rose at the lowest rate in over a decade, and any upward pressures
on inflation were surprisingly subdued.
Although many economists still worry about potential upward pressures on the inflation
rate, last year's low inflation
and foreign economic crises have produced a new set of concerns. In particular, some
economic observers and financial market participants are concerned that disinflation, the
process of lowering the inflation rate, may go so far as to produce deflation, a
persistent decline in the general price level. These observers point to large decreases in
petroleum prices and other primary commodity prices, rapidly falling computer prices, and
moderate declines in U.S. nonoil import prices as possible signs of deflation.
Garner argues that last year's favorable inflation performance, while suggestive of
further modest progress toward price stability, does not foreshadow an emerging
deflationary period. He reviews price developments over the last year, showing that many
broad measures of inflation declined in 1998, but most remained positive. He also examines
the slight decline in long-term inflation expectations last year and its implications for
future monetary policy.
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Poverty is arguably the most pressing economic problem of
our time. And because rising inequality, for a given level of income,
implies greater poverty, the distribution of income is also a central concern. At the same
time, monetary policy is one of the modern age's most potent tools for managing the
economy. Given the importance of poverty and the influence of monetary policy, it is
natural to ask if monetary policy can be used as a tool to help the poor.
In a presentation at the Federal Reserve Bank of Kansas City's 1998 symposium,
"Income Inequality: Issues and Policy Options," Christina and David Romer
examined the influence of monetary policy on poverty and inequality both over the business
cycle in the United States and over the longer run in a large sample of countries. They
argued that although expansionary policy induces a decline in the poverty rate, the
decline is eventually reversed. Second, monetary policy that aims to restrain inflation
and minimize output fluctuations is likely to be associated with improved conditions for
the poor over time.
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The plunge in world oil prices has brought further
difficulties to U.S. oil production, which has been declining in recent years. At the
current low prices, most domestic oil wells are not profitable. This calls into question
the long-run viability of oil production in the United States. Whether oil production
remains a viable part of the U.S. economy in the next century will depend on how long oil
prices remain at their current low levels.
Lamb and Wilkerson show how the recent low prices for oil on world markets reflect a
combination of demand and supply effects, with both short-run and long-run forces at work.
For example, sluggish demand growth reflects both milder weather in some parts of the
world (a short-run phenomenon) and the impacts of the Asian financial crisis, which could
persist for some time. Meanwhile, supply has mushroomed, in part due to the short-run
effect of Iraq's return to higher levels of oil production. In the main, however, the
increase in supply reflects sharp declines in the cost of discovering and extracting oil
reserves. On balance, the current low prices appear to be mainly the result of longer run
demand and supply forces, suggesting that prices are likely to remain low for some time to
come. If world oil prices do remain low, U.S. oil is unlikely to be competitive in world
markets. Therefore, the domestic oil sector is likely to continue to lose market share for
the foreseeable future.
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The year just past was one of turbulent markets and unmet
expectations for most of U.S. agriculture. Public and private attention focused mainly on
the steep drop in farm commodity prices, and when the soggy markets might show signs of
recovery. Yet while they captured most of the headlines, weak prices were also
contributing to subtle, and some not so subtle, changes in U.S. agriculture. Taken
together, these changes amounted to a new wave of consolidation that spread throughout the
industry. Consolidation is certainly not new in agriculture---it has been underway for
most of the 20th century. What is new is the type and speed of the consolidation. The
consolidation
is receiving widespread attention, but many observers overlook how it will redraw the
economic landscape in rural America, posing formidable new challenges for many rural
communities.
In testimony before the Senate Committee on Agriculture, Nutrition, and Forestry in
January, and the House Committee on Agriculture in February, Drabenstott addressed the two
key questions that surround this critical topic. First, what does consolidation mean for
U.S. agriculture and its participants? And second, what issues, if any, does the new wave
of consolidation pose for public policy?
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Markets for U.S. farm products took a sudden, unexpected
turn for the worse in 1998, as supply and demand factors combined to produce a plunge in
crop prices. Most parts of the nation had very favorable growing conditions in 1998,
resulting in an abundant harvest of the major crops, and pushing prices lower. Likewise,
the supply of red meat products in the marketplace soared, as both beef and pork producers
boosted production, with pork production hitting a record high. But as supply soared,
demand weakened. In particular, the economic crisis in Asia led to a drop in ag exports to
many Asian countries. And problems in Asia also contributed to a slowdown in world
economic growth more generally, and thus global demand for U.S. farm products slumped.
Lamb reviews the year just past for U.S. agriculture and suggests that, after the
gyrations of 1998, the year ahead is one of particular uncertainty. The outlook for farm
income depends critically on the role the government will play in the farm sector. If the
government grants farmers another round of additional government subsidies, then farm
income will likely hold steady. If government subsidies retreat from the high levels of
1998, however, farm income could fall sharply in 1999.
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The Tenth District economy slowed down in 1998, with employment growing
marginally below the national average. Despite very tight labor markets, employment growth
remained healthy in many sectors. Construction; trade; transportation, communications, and
public utilities; and finance, insurance, and real estate---all posted healthy gains. The
manufacturing and service sectors, however, turned in weak growth, a result of the Asian
financial turmoil and a shortage of skilled workers throughout the district. District
agriculture had a difficult year, as commodity prices plunged in the face of rising
supplies and weakening demand. A large aid package from Congress late in the year
prevented farm incomes from being considerably less than in 1997.
Gazel and Wilkerson discuss why the district economy is likely to slow further in 1999,
growing only modestly compared with the recent past. The expected slowdown of the national
economy, continued economic weakness in the rest of the world, and very tight labor
markets throughout the district are all likely to play major roles in the district
economic slowdown. Some sectors of the district economy, such as manufacturing and mining,
are likely to be hurt more than others in the near future. The service sector is likely to
repeat its weak 1998 performance, while a reduction in consumer spending will slow growth
in retail and wholesale trade in 1999. Construction activity may weaken a bit in 1999, and
the district farm economy is likely to face a difficult year unless the government acts to
further boost subsidies.
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