The primary goal of Federal Reserve monetary policy is to foster maximum long-term growth in the U.S. economy by achieving price stability over time. Price stability will be achieved, according to some definitions, when inflation ceases to be a factor in the decision-making processes of businesses and individuals. Although the Federal Reserve has made considerable progress toward price stability since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because stable prices are essential to maximum long-term economic growth and living standards, the Federal Reserve seeks to contain and gradually reduce inflation until price stability is attained.> Clark reviews inflation developments in the United States during 1996 in relation to the Federal Reserve's goal of achieving price stability over time. He first examines the behavior of inflation over the past year, showing that sharp increases in food and energy prices caused most overall inflation measures to rise, while inflation in nonfood and nonenergy prices slowed. Second, he shows that expectations of future inflation held steady at about the current rate, indicating the public expects no further progress toward price stability. Finally, he evaluates some inflation measurement issues raised in 1996, concluding that problems in accurately measuring inflation will require the Federal Reserve to monitor all price trends with vigilance. Together, the inflation developments of the past year were mixed.
