Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman and the “Cruel Dilemma”

Abstract

This paper addresses two conflicting views in the 1950s and 1960s about the inflation-unemployment tradeoff as given by the Phillips curve. Many economists at this time emphasized the issue of a seemingly unavoidable inflationary pressure at or even below full employment. In contrast, Milton Friedman was convinced that full employment and price stability are not conflicting policy objectives. This dividing line between the two camps ultimately rested on fundamentally different views about the inflationary process: For economists of the 1950s and 1960s cost-push forces are responsible for the apparent conflict between price stability and full employment. On the other hand, Friedman, who regarded inflation to be an exclusively monetary phenomenon, rejected the notion of ongoing inflationary cost-push pressures at full employment. Besides his emphasis on the full adjustment of inflation expectations, this rejection of cost-push theories of inflation, which implied a decoupling of the two previously perceived incompatible policy objectives, was the other important element in Friedman's attack on the Phillips curve tradeoff in his 1967 presidential address to the American Economic Association.