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Economic Report Card - Inflation is an A
Subject Inflation
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Economic Growth
News Story

Economic reports by the Labor and Commerce Departments, as well as the Federal Reserve, provide evidence that inflation decreased in 2001 and that there are hopeful signs that the recession may end soon. Inflation, as measured by the Consumer Price Index, rose 1.6 percent in 2001 compared with a 3.4 percent increase in 2000. Industrial production, according to a report released by the Federal Reserve, fell 0.1 percent in December, the smallest decline in 5 months. The decline indicates that the manufacturing sector, hard-hit by the recession, may be stabilizing. Further support that production may increase shortly comes from a Commerce Department report that inventories fell in both November and December.

December's Consumer Price Index fell 0.2 percent as a result of declines in energy, apparel, food and beverages and tobacco prices. Energy prices were significantly lower in December 2001 compared to the previous December. Gasoline prices were 24.9 percent lower, home heating oil prices fell 22.2 percent and natural gas prices decreased 15.1 percent. Another sector with significant price reductions was computers and related equipment. Compared to December 2000, last month's prices were 30.7 percent lower. On the other hand, medical care prices rose 4.7 percent, the largest rise since 1994, and rents for homes and apartments, one of the most important categories in the CPI, rose 4.6 percent. The core CPI, that is, the CPI minus the volatile food and energy sectors, rose 2.7 percent in 2001. This was 0.1 percent higher than in 2000 and represents the largest increase since 1995.

The decline in industrial production, reported by the Federal Reserve, came largely as a result of a 4.1 percent increased motor-vehicle production. Computers, semiconductors and communications equipment rose 0.3 percent in December after a very sharp decline at the beginning of 2001. The data do not indicate overall strength in the economy; for example, excluding motor-vehicle production, factory output fell 0.5 percent.

Another hopeful sign comes from a Federal Reserve survey conducted by the Fed's 12 regional banks. According to the report describing the survey results, although economic activity generally remained weak from late November through early January, "recovery will begin by mid-year or earlier but timing and strength are uncertain."

(Updated February 13, 2002)

Questions
1. The CPI report shows that some prices decreased while others increased during the year. What is inflation? How can prices decrease when inflation is increasing?
2. The various reports released this month provide some reason for optimism concerning an economic recovery. Why does evidence that business firm inventories are decreasing provide hope for increased industrial production?
3. What is the core CPI? Why are food and energy sectors omitted from the calculation? Is the rise in the core CPI of 2.7 percent a better indication of what is happening to prices than the increase of 1.6 percent in the overall CPI?
Source John M. Berry, "Falling Energy Prices Helped Inflation Rate Decline in 2001," The Washington Post, January 17, 2002.

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