A Consistent Characterization of a Near-Century of Price Behavior

This paper develops a single econometric equation that can explain most of i the variation in the aggregate U.S. rate of inflation during the period between 1892 and 1978. Unlike previous studies that have omitted the Depression and World War II years, the present equation can explain the 1929-1945 period as well as other years. The equation is derived from a simple aggregate supply equation and makes the rate of price change depend on the rate of change of nominal GNP, the level of detrended real GNP, and on expected price change; the latter, in turn, depends on lagged values of price change and nominal GNP change. Four additional factors are identified that have had a significant impact on the price-setting process: the National Recovery Act (1933)(1934)(1935)(1936), World War II price controls (1943)(1944)(1945)(1946)(1947), the Nixon-era controls (1972~1975), and the relative prices of food and energy.