South-Western College Publishing - Economics  
Economic Recovery Without Inflation?
Subject Inflation and a Growing Economy
Topic Output, Income, and the Price Level
Key Words Consumer Prices, Economic Recovery, and Industrial Production
News Story

Economic news continues to be good and it raises hopes that the economic recovery will be a lasting event. One of the main worries to economists--that of a surging economy--is the fear of rapidly increasing prices. Rapidly increasing price levels across many sectors of the economy (also called inflation) can hinder consumer spending and lead to a fall in economic activity. The news, however, is favorable for a non-inflationary recovery. Industrial production is surging and housing starts are growing while inflationary numbers have been stable or falling.

Industrial production jumped 0.9 percent in November, the strongest performance in four years, indicating that the nation's battered and bruised manufacturing sector is truly on the mend. "We have been anticipating and hoping for a robust turn-around in manufacturing for some time," said David Huether, chief economist at the National Association of Manufacturers.

The red-hot housing market continued to grow in November. Construction of new homes rose by 4.5 percent to a rate of 2.07 million homes per year. This is the fastest building pace in nearly two decades, according to the U. S. Commerce Department.

Even with all this surging economic activity, consumer prices have risen at a seasonally adjusted annual rate of only 1.8 percent for the first 11 months of this year. This compares to an annual rate of 2.4 percent for all of 2002.

Add these reports together, and it appears that the economic recovery will continue without the threat of serious inflation. "We have no inflation, once idle factories are pumping out goods and houses are being erected at a breakneck pace. This is a perfect recipe for economic strength," said Richard Yamarone, economist at Argus Research Corporation.

(Updated February, 2004)

Questions
1.

Define inflation.

2. If inflation were to occur because of the surging economy, what groups in the economy would be hurt by rising price levels?
3. If inflation were to occur because of the surging economy, what groups in the economy gain from the rising prices?
Source Associated Press, "Signs of Recovery Come Without Inflation," Florida Today, December 17, 2003.

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