E C O N O M I C R E P O R T O F T H E P R E S I D E N T

InflationAccelerating inflation poses a threat to expansions and, unless kept undercontrol, eventually brings them to a halt. Chart 1-10 shows the pattern ofcore inflation, as measured by the consumer price index excluding food andenergy, in the three long expansions since 1960. The 1960s expansion wasmarked by 5 years of strong economic growth with low inflation. Administrationpolicies in those years restored prosperity and full employment afterbouts with recession between 1957 and 1961. But during the mid-1960s, thepressures of expenditure at the time of the Vietnam War stretched industrialcapacity too much, causing inflation to accelerate rapidly, until rising interestrates and monetary restraint brought the expansion to an end.The 1980s expansion started with very high unemployment and slackresources, which helped restrain inflation in the early years of the expansion,as did the collapse of oil prices and a strong dollar. But eventually the inflationpath flattened out and started to turn up as the economy reached lowerlevels of unemployment.The pattern of inflation over the current expansion is surprising: coreinflation has been low and stable, when not actually declining, even asunemployment has approached 4 percent. Chapter 2 describes several factorsthat have contributed to this combination of low inflation and low unemployment.Certainly the pattern of productivity described earlier and therapid expansion of capacity have been important. The importance of investmentfor productivity growth was noted above, but rapid investment growth36 | Economic Report of the President