Understanding Inflation in the 1980s.

This article it attempts to identify elements of continuity and change in the inflation data regarding the U.S. within the context of some earlier research, and it contains no review of the literature. It also follows up a 1984 paper by the author, which created a measure of potential GNP that corresponds to a series for the natural rate of unemployment developed in the earlier research. In the article potential GNP has been referred to as natural GNP to emphasize its correspondence with the natural unemployment rate. In the series the natural unemployment rate starts at about 5 percent in the 1950s, and rises in response to demographic changes to about 6 percent beginning in the early 1970s. Rather than start from scratch with another investigation of alternative unemployment concepts, this paper takes as its basic measure of aggregate demand pressure the ratio of actual real GNP to the natural GNP series developed in 1984. A major purpose here is to determine whether the natural GNP series understates or overstates the economy's noninflationary operating level.