than conventional estimates suggest, implying that incipient disinflationary pressures may be more intense. of the various elements that make up the expectations - augmented phillips curve, the degree of economic slack is the one currently providing the greatest impetus for further disinflation. by contrast, other elements of this conventional framework offer somewhat more reason to hope that inflation will instead stabilize at current levels or fall only slightly. in particular, as best we can tell, the public ’ s inflation expectations have not declined very much, particularly at longer horizons. for example, according to the university of michigan ’ s survey research center, the median respondent ’ s expectation of inflation over the next twelve months fell from 2. 5 percent in january 2003 to 2. 1 percent in june ; however, the median expectation for inflation for the next five to ten years was 2. 7 percent in both january and june. inflation compensation at the five - year horizon as measured by indexed government bonds has cycled up and down recently but has averaged about 1. 5 percent since early 2001. interpretation of all these measures of expected inflation is made more difficult by the fact that they are defined for total ( as opposed to core ) cpi inflation and hence presumably are affected by fluctuations in energy prices. nevertheless, the evidence thus far does not support the view that there has been a significant break in medium - term inflation expectations. supply shocks are another element of the modern phillips curve framework. in this category the most relevant current factor is probably the recent decline in the exchange value of the dollar. for a various reasons, including the limited pass - through of price increases by foreign producers and uncertainties about the future course of the dollar, the dollar ’ s fall is likely to have only a modest effect on the inflation rate ; but any effect it has should work against further disinflation. overall, the stabilizing effects of well - anchored inflation expectations and the slightly inflationary effect of the dollar depreciation are two reasons to expect whatever disinflation takes place to be reasonably gradual. some economists argued that the tendency of real wages to lag behind the unexpectedly strong productivity gains of the 1990s also reduced sustainable unemployment during that period ( ball and moffitt, 2001 ; see also braun, 1984 ). to the extent this argument was valid, presumably this factor is less relevant today, because productivity growth has moderated somewhat and has probably become more fully incorporated into the wage determination process. preliminary july figures show a drop in

decades - long war on inflation - - dubbed “ public enemy number one ” in some public opinion polls in the 1970s - - imagining that a “ substantial fall in inflation ” would be unwelcome seems just a bit strange. why does this risk, minor though it may be, concern the fed? let ’ s first be clear what we are talking about. some in the media apparently interpreted the may 6 statement as saying that the federal reserve anticipated imminent deflation in the united states and informed the public accordingly. in my view, such an interpretation substantially overstates the concerns that the fomc intended to communicate with its statement. first, we have no reason to think that a drastic change in the inflation rate is imminent. should further declines occur, a more gradual downward drift over a period of one to two years would be the more likely scenario. second, nowhere did the statement refer specifically to deflation ( that is, to a decline in the general price level ) ; rather, the reference was, again, to a “ substantial fall in inflation. ” in the present circumstances, a disinflation ( a decline in the rate of inflation ) and a deflation ( a falling price level ) are not necessarily the same thing. inflation could decline somewhat from present levels and still remain positive, although it is true that the lower the inflation rate goes, the greater is the risk of actual deflation at some future time. this distinction between inflation that is positive yet too low and deflation is worth exploring for a moment. although the federal reserve does not have an explicit numerical target range for measured inflation, fomc behavior and rhetoric have suggested to many observers that the committee does have an implicit preferred range for inflation. most relevant here, the bottom of that preferred range clearly seems to be a value greater than zero measured inflation, at least 1 percent per year or so. both the apparent tendency of measured inflation to overstate the true rate of price increase, as suggested by a range of studies, and the need to provide some buffer against accidental deflation serve as rationales for aiming for positive ( as opposed to zero ) measured inflation, both in the short run and in the long run. to the extent that one accepts the view that measured inflation should be kept some distance above zero, a very low positive measured rate of inflation ( say, 1 / 2 percent to 1 percent per year ) is undesirable and implies a need for highly accommodative monetary policy