South-Western College Publishing - Economics  
Inflation Creep - Or Has It Become A Crawl?
Subject Inflation
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Consumer Price Index, Federal Reserve, Monetary Policy, Productivity
News Story

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose 0.1 percent from April to May. Although a monthly rise of 0.1 percent is considered to be a benign indicator of inflation, the May report did cause some concern among economists. For the past 12 months, the CPI has increased 3.1 percent and the average rate of increase in the last 6 months is one-half percent greater than for the preceding 6 months. Some economists feel that the inflation rate is accelerating. The CPI is expected to rise in June, led by increased gasoline prices.

The apparent cause of the increase in inflationary pressures is consumer demand. The strong economy has been buoyed by consumer spending and companies have apparently reacted by raising prices. In other inflationary episodes labor costs have initiated retail price hikes, but there is little evidence in this instance to blame labor cost increases. When labor cost increases exceed productivity gains, firms first try to pay for these increased costs by cutting profits. There is no evidence that profits have fallen.

Housing and medical care cost increases are two important reasons for the accelerating inflation rate. Housing costs have risen 2.9 percent over the past 12 months while medical costs have jumped 4 percent. The rise is hospital rates and the cost of prescription drugs are factors in the increase in medical care costs.

Gasoline prices are a volatile component of the CPI. Gasoline prices have soared in the past 12 months, although they were reported to have fallen in the April-May time frame. Aside from the direct impact on the CPI of higher gasoline prices, there is little evidence that prices in other sectors besides airline fares have risen as a result. Airline fares were up 0.8 percent in May because of higher fuel prices.

(Updated July 1, 2000)

Questions
1. Describe Cost-Push Inflation?
2. Using aggregate demand/aggregate supply diagrams show how inflation could result from an increase in consumer demand.
3. What is the difference between a one-time rise in consumer prices and an inflationary process?
4. What happens to inflation depends importantly on what the Federal Reserve does. How can the Federal Reserve influence the rate of inflation? What instruments does it have available to do this?
Source Louis Uchitelle, "Report Shows Long-Term Inflation Is Gaining," The New York Times, June 15, 2000.

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