InflationCauses,Costs,andCurrentStatus.pdfVIP

Inflation: Causes, Costs, and Current Status Marc Labonte Specialist in Macroeconomic Policy July 26, 2011 Congressional Research Service 7-5700 RL30344 CRS Report for Congress Prepared for Members and Committees of Congress Inflation: Causes, Costs, and Current Status Summary Since the end of World War II, the United States has experienced almost continuous inflation— the general rise in the price of goods and services. It would be difficult to find a similar period in American history before that war. Indeed, prior to World War II, the United States often experienced long periods of deflation. It is worth noting that the Consumer Price Index (CPI) in 1941 was virtually at the same level as in 1807. During the last two economic expansions, March 1991-March 2001 and November 2001- December 2007, the inflation rate remained low by the standards of previous decades, and has remained low since this recession began. This is true regardless of which index is used to calculate the rate at which the price of goods and services rose. A low inflation rate is especially significant since the U.S. economy was fully employed, if not over fully employed, according to many estimates for the last three years of the 1991-2001 expansion and during 2006-2007. Yet, contrary to expectations, the inflation rate accelerated only modestly. Keeping an economy moving along a full employment path without igniting a burst of inflation is a difficult policy task. Because labor costs make up nearly two-thirds of total production costs, the rate at which they rise is often regarded as an indication of future inflati