correction to stock prices, and an associated increase in the cost of equity capital, could compound a slowdown in the growth of capital spending. in addition, a stock market decline would tend to restrain consumption spending through its effect on household net worth. but on the upside, our economy has proved surprisingly robust in recent years. more rapid increases in capital spending, productivity, real wages, and asset prices have combined to boost economic growth far more and far longer than many of us would have anticipated. this “ virtuous cycle ” has been able to persist because the behavior of inflation also has been surprisingly favorable, remaining well contained at levels of utilization of labor that in the past would have produced accelerating prices. that it has not done so in recent years has been the result of a combination of special one - time factors holding down prices and more lasting changes in the processes determining inflation. among the temporary factors, the sizable declines in the prices of oil, other internationally traded commodities, and other imports contributed directly to holding down inflation last year, and also indirectly by reducing inflation expectations. but these prices are not likely to fall further, and they could begin to rise as some asian economies revive and the effects of the net depreciation of the dollar since mid - summer are felt more strongly. at the same time, however, recent experience does seem to suggest that the economy has become less inflation prone than in the past, so that the chances of an inflationary breakout arguably are, at least for now, less than they would have been under similar conditions in earlier cycles. several years ago i suggested that worker insecurity might be an important reason for unusually damped inflation. from the early 1990s through 1996, survey results indicated that workers were becoming much more concerned about being laid off. workers ’ underlying fear of technology - driven job obsolescence, and hence willingness to stress job security over wage increases, appeared to have suppressed labor cost pressures despite a reduced unemployment rate. more recently, that effect seems to have diminished in part. so while job loss fears probably contributed to wage and price suppression through 1996, it does not appear that a further heightening of worker insecurity about employment prospects can explain the more recent improved behavior of inflation. instead, a variety of evidence, anecdotal and otherwise, suggests that the source of recent restrained inflation may be emanating more from employers than from employees. in the current economic setting, businesses sense that they have lost pricing power and generally have been unwilling to

raise wages any faster than they can support at current price levels. firms have evidently concluded that if they try to increase their prices, their competitors will not follow, and they will lose market share and profits. given the loss of pricing power, it is not surprising that individual employers resist pay increases. but why has pricing power of late been so delimited. monetary policy certainly has played a role in constraining the rise in the general level of prices and damping inflation expectations over the 1980s and 1990s. but our current discretionary monetary policy has difficulty anchoring the price level over time in the same way that the gold standard did in the last century. enhanced opportunities for productive capital investment to hold down costs also may have helped to damp inflation. through the 1970s and 1980s, firms apparently found it easier and more profitable to seek relief from rising nominal labor costs through price increases than through cost - reducing capital investments. price relief evidently has not been available in recent years. but relief from cost pressures has. the newer technologies have made capital investment distinctly more profitable, enabling firms to substitute capital for labor far more productively than they would have a decade or two ago. starting in 1993, capital investment, especially in high - tech equipment, rose sharply beyond normal cyclical experience, apparently the result of expected increases in rates of return on the new investment. had the profit expectations not been realized, one would have anticipated outlays to fall back. instead, their growth accelerated through the remainder of the decade. more direct evidence confirms improved underlying profitability. according to rough estimates, labor and capital productivity has risen significantly during the past five years. it seems likely that the synergies of advances in laser, fiber optic, satellite, and computer technologies with older technologies have enlarged the pool of opportunities to achieve a rate of return above the cost of capital. moreover, the newer technologies have facilitated a dramatic foreshortening of the lead times on the delivery of capital equipment over the past decade, presumably allowing businesses to react more expeditiously to an actual or expected rise in nominal compensation costs than, say, they could have in the 1980s. in addition, the surge in investment not only has restrained costs, it has also increased industrial capacity faster than factory output has risen. the resulting slack in product markets has put greater competitive pressure on businesses to hold down prices, despite taut labor markets. the role of technology in damping inflation is manifest not only in its effects on u. s. productivity and