Growth and Inflation: Analysis by Industry

THE BELIEF that prices are determined primarily by demand factors (at least in the short run) continues to dominate the thinking on inflation, even by those who reject most of neo-Keynesian macroeconomics. The widespread conviction that only a slowdown in economic activity will mitigate price increases implicitly accepts the concept of a Phillips curve despite its failing econometric support. While some supply shifts, particularly in energy, have been generally recognized, they are usually awarded no more than incidental importance. The aim of this paper is to assess the relative importance of demand factors and supply factors on a disaggregated level, specifically the twodigit industry level for the entire U.S. economy. The essence of the Phillips relation is a positive association between changes in real output and changes in price.' If true, it would mean that,