inflation rate. In cliche form, inflation results from too much money chasing too few goods. To assess the prospects for rising inflation, the analysis is divided into the goods market and the money market. The faster the supply of goods expands, the lower will be the rate of inflation. A continuation of Reagan's economic policies will result in higher growth and lower inflation. If output contracts or grows slowly, inflation will be that much higher (Figure 7.4). On the goods side of the inflation equation, the prospects for increased inflation just are not there! In fact, lower inflation would be the direct implication growing out of this analysis of the U.S. goods market.
On the money side of the inflation equation, the case for lower inflation is equally as strong. For some time now, the Federal Reserve has de-emphasized money growth targets in favor of price targets. As a result, interest rates are lower, and commodity prices have become far more stable. 3