The Fed has a dual mandate, written into law, from Congress: maintain stable prices and achieve maximum employment. The graph above shows the track record for the first part of the mandate, which is what we focus on here. Now, the interpretation of what “stable prices” means has changed over time, but the Fed’s current inflation target is about 2%. And, indeed, it looks like the Fed has done a pretty good job since the 1980s compared with previous periods. What about before that?
First, the Fed didn’t exist until 1913; and the pre-Fed period had wild swings in the inflation rate, as well as long periods of deflation, which some consider very problematic. Between the world wars, inflation was quite erratic, too, with some bouts of deflation. But Fed policy wasn’t driven by an inflation mandate at that time, but rather by a gold standard. From World War II up until the 1970s, the U.S. had a couple of episodes of high inflation, but there was no inflation mandate then either. In fact, there was also quite a bit of federal government intervention in monetary policy. Obviously, this short list oversimplifies the history of inflation in the U.S., but it looks like having a clear objective may have helped the Fed focus on and achieve this particular metric.
How this graph was created: Start at the NBER’s Macrohistory Database. Select the index of the general price level and click “Add to Graph.” From the “Edit Graph” panel, use the “ADD LINE” option to search for and select CPI. Change units to “Percent Change from Year Ago,” and click “Copy to all.”
Some industries change for understandable reasons, at least in hindsight. For example, the horse buggy sector collapsed when the automobile became widespread, and the electronics industry has grown tremendously in recent decades because of innovation and high demand for its products. For some sectors, though, expansion is a little more puzzling. The graph shows some statistics about the warehousing and storage sector. What’s noticeable here is that this sector was unaffected by the previous recession and has grown quite a bit: In about 20 years, its personnel, compensation, and output all doubled. Over the same time span, real GDP grew by less than 60%. So what’s going on? Maybe the economy has shifted away from just-in-time production to processes that require more storage. Maybe the storage industry has become more competitive. Or maybe the impact of Marie Kondo’s “tidying up” efforts are more pervasive than we imagined.
How this graph was created: Search for “warehousing and storage,” select the series available in the search results, and click on “Add to Graph.” Any missing series can be searched for and added to the graph from the “Edit Graph” panel with the “Add lines” feature. For the compensation series, we need to deflate it as it is in nominal terms: open its tab, add series “GDP deflator,” and apply formula a/b. Finally, for all series, set units to 100 for 1998-01-01.