On Disinflation since 1982: An Application of Change-Point Tests

On October 6, 1979, the Federal Open Market Committee of the Federal Reserve System embarked on an aggressive policy to lower the inflation rate, which then stood near 12 percent. That effort succeeded: By the mid-1980s, the rate of change in the Consumer Price Index (CPI) was reduced to less than 4 percent on a three-year moving-average basis, as shown in figure 1. The commonly reported measure of core inflation — the CPI less food and energy— also fell substantially. Since then, both inflation measures have been relatively stable, ranging between 3 and 5 percent for the CPI and between 4 and 5 percent for the CPI less food and energy. In the most recent three-year period, however, both measures have fallen to rates not seen since the mid-1960s. The behavior of inflation since the early 1980s evokes some interesting policy questions. Has inflation stabilized around some particular rate over the long term? Or will it be