Federal Reserve Bank of Cleveland
Press Release

For Release: September 18, 1997
Contact: June Gates, 216/579-2048

Is Noninflationary Growth an Oxymoron?

Conventional wisdom holds that the above-average economic growth currently enjoyed by the United States will inevitably trigger inflationary pressures. However, Federal Reserve Bank of Cleveland Economists David Altig, Terry Fitzgerald, and Peter Rupert say it is quite possible to enjoy a booming economy without an acceleration in price levels.

While acknowledging that inflation and above-average growth have tended to coincide in the past, Messrs. Altig, Fitzgerald, and Rupert contend that the widely held perception that inflation is linked to rapid GDP growth can be traced, in part, to a less-than-accurate portrayal of economic theory and evidence. One consequence of this misperception, they explain, is the belief that the Federal Reserve--if it desires to contain inflation--must also contain economic growth.

Writing in a recent Economic Commentary, the authors state that economic growth is not necessarily a precursor to increasing inflation, and expanding employment and income do not threaten the Fed’s role in protecting the purchasing power of money. In stating their case for disinflationary economic growth, they say that rising prices follow from nominal money supply growth in “excess” of its demand. More rapid GDP growth, however, implies an increase in the growth of the demand for money. Thus, if other factors are equal, an increase in GDP growth should lead to disinflation, not rising inflation.

Altig and his colleagues note that, if at a time of expanding output, the demand for goods and services grows even faster, interest rates will rise. Holding monetary policy constant, inflation will uptick if the negative impact on money demand from rising interest rates dominates the positive influence of more rapid GDP growth.

Altig et al. concede the popular view of growth and inflation is not totally without foundation. However, the case for a positive connection between expanding GDP and inflationary pressures is not as compelling as is often assumed. Therefore, it is incumbent upon economists and policymakers to clearly articulate how various shocks to our economy affect output, unemployment, and inflation. Treating statistical rules of thumb that equate rapid output growth with accelerating inflation as if they were theory masks the underlying structure of price determinants and hinders informed public discussion of monetary policy.

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