The U.S. economy turned in an exceptional performance in 1999, combining strong real output growth with moderate inflation. Real GDP, a broad measure of the nation's output of goods and services, grew 4.6 percent from the fourth quarter of 1998 to the fourth quarter of 1999. Employment also rose solidly, and the civilian unemployment rate declined to the lowest level in about 30 years. Although rising world oil prices caused consumer prices to increase faster than in 1998, core inflation measures, which exclude food and energy prices, were about the same or slightly lower. Moreover, survey measures of long-term inflation expectations were stable despite the robust pace of the economic expansion.> What accounts for this exceptional combination of rapid growth and moderate inflation? Several factors helped hold down the inflation rate, including strong import competition and ample industrial capacity at home and abroad. But many recent discussions have emphasized the pronounced increase in productivity growth, reflecting both the high level of business investment and accelerated technological change. In particular, new information technologies, such as computers and the Internet, may be increasing economic efficiency through better coordination of business activities and reduced inventories. The evidence is unclear, however, about how much of the productivity acceleration is due to new technologies, and whether faster productivity growth can be sustained in the years ahead.> Such questions are crucial in judging whether rapid growth can continue without undermining the Federal Reserve's long-run objectives of price stability and sustainable economic growth. Garner examines recent inflation developments and the policy implications of faster productivity growth.
