The Historical and Recent Behavior of Goods and Services Inflation

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Economic Policy Review

The Historical and Recent Behavior of Goods and Services Inflation

December 2004 Volume 10, Number 3

JEL classification: C32, E31

Authors: Richard Peach, Robert Rich, and Alexis Antoniades

Since the late 1990s, the combination of relatively high services inflation and declining goods prices has produced a record-level gap in these inflation rates. Some commentators argue that if the gap between services and goods inflation continues to expand in this manner, the outcome will be either faster overall inflation or deflation. This article examines the relationship between these divergent inflation rates from 1967 to 2002. The authors find that while the level of each inflation rate is subject to permanent shifts, the gap between services inflation and goods inflation over time remains stable. Moreover, when the gap is above its long-run value, as it currently is, equilibrium is restored through a rise in goods inflation and a slowing of services inflation. Their results suggest that concerns over an imminent marked acceleration or dramatic slowing in inflation may be unwarranted.

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13 pages / 178 kb

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