South-Western College Publishing - Economics  
Inflation Fears Remain
Topic Employment, Unemployment, and Inflation
Key Words Wholesale Prices and Inflation
News Story The producer price index, a measure of what businesses charge each other for goods and services shot up in November. The measure, which includes everything from iron ore and diesel fuel to cases of soda pop, was 2 percent higher in November than in October. The measure had not risen by that much in a single month in more than 32 years.

The increase was led by rising gasoline prices which had fallen considerably in October. Light trucks also experienced a significant fall in October only to rise again in November. Rising prices for gasoline and light trucks which provide transportation for goods between businesses fall into what economist call cost-push inflation. When these types of cost increase to firms, the increased cost is passed forward to consumers. Thus comes the name, cost-push inflation.

Even with the volatile prices of food and fuel removed, the "core" price index rose by 1.3 percent for the month, the most since 1980.

Some analysts have been predicting a move by the Federal Reserve to begin reducing interest rates by early spring. This latest report by the Labor Department would seem to reduce the odds of this happening. The report reinforces the message coming from the Fed lately that inflation has not yet been beaten.

The Fed considers an increase of more than 2 percent too high and moves to fight the inflationary forces in the economy. The latest report is on the borderline of 2 percent and leaves the Fed's response very much up in the air.

Questions
Discussion Questions:
1. Use an Aggregate Supply -Aggregate Demand Model to explain cost-push inflation.
2. Why does this report suggest that the Fed may not move to lower interest rates in the near future?
Multiple Choice/True False Questions:
1. Cost-push inflation comes from:
  1. excess consumer spending.
  2. increased supply.
  3. increased demand.
  4. none of the above
2. The Producer Price Index measures price movements:
  1. between consumers and businesses.
  2. between government and business.
  3. between business and business.
  4. none of the above.
Source Jeremy W. Peters, "Economic Report Provides Reminder on Inflation" The New York Times Online, December 19, 2006.
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