The Postwar Baby Boom and Inflation

In a 1959 study prepared for the Joint Economic Committee, Charles L. Schultze introduced the concept of structural inflation. Schultze's hypothesis was that the inflation this nation had been experiencing during the mid-50's could not fully be explained by either of the traditional inflation theories?cost-push or demand-pull, neither of which he felt played a dominant role. Rather, he asserted, the structure of the American economy was the cause of the inflation. Schultze's theory relied on the observation that, in the American economy, both prices and wages are much more sensitive to increases in demand than to decreases. Therefore, he proposed, a rapid shift in the composition of demand would lead to an overall rise in prices. Prices would rise in those sectors of the economy where demand was growing rapidly, yet at the same time fail to decline (or perhaps even rise slightly) in those sectors where demand was decreasing. The mechanism for the overall price increase was inherent in input prices. When the composition of demand changed rapidly, the cost of in? puts overall would tend to rise since increases in the cost of inputs in heavy demand would not be counteracted by decreases in the cost of inputs in excess supply. This was to be true for labor as well as for other inputs. Thus, even those sectors facing a decreased demand for their products saw their costs increase, and likely passed some of these higher costs on in the form of high prices. Therefore, the re? sulting inflation originated in those sectors with excess demand, and it spread to other sectors through the cost mechanism.