An evaluation of the decline in goods inflation

Abstract

Over the past decade, the worldwide average for inflation has plummeted from 30 percent to 4 percent. For many countries, especially those starting out with high inflation rates, falling inflation has been desirable. But the experiences of other countries have raised the question of whether inflation can be too low. In some economies, inflation has dipped to levels that risk disruption of the normal functioning of the economy. ; In the United States, many commentaries on the potential for deflation have noted the sharp contrast between goods and services prices. Excluding food and energy, goods prices as measured by the chain price index for personal consumption expenditures (PCE) dropped 2¼ percent in 2003. Yet nonenergy services prices rose nearly 2½ percent last year. Moreover, goods inflation has fallen sharply over the past decade or so, while services inflation has declined only modestly. In 1993, PCE inflation was about ¾ percent for goods and 3¼ percent for services. ; Clark assesses whether the decline in consumer goods inflation relative to services should be cause for concern in the United States. His analysis focuses on three interrelated questions about the decline in goods inflation relative to services: Was it unusual? What caused it? And is it likely to continue? He concludes that the fall in goods inflation relative to services over the past decade is most likely a temporary phenomenon due to dollar appreciation and, to a lesser extent, increased global competition.Inflation (Finance) ; Consumer goods