South-Western College Publishing - Economics  
Inflation In Check
Subject Inflation, Economic Fluctuations
Topic Inflation
Key Words Inflation, Economic Growth, Consumer Price Index, Index of Industrial Production, Index of Consumer Confidence
News Story

The Labor Department reported that consumer prices remained unchanged in September: the first time in six months that the index was constant. Other economic news included a Federal Reserve report that industrial production had declined in September. In addition, the University of Michigan's index of consumer confidence fell in October from its September figure. All these reports point to a slowing economy with virtually no risk of a surge in inflation.

According to the Labor Department, the core rate of inflation, which excludes volatile food and energy prices, rose two-tenths of 1 percent in September. Health care costs were higher, but their impact on the overall Consumer Price Index was offset by falling energy and transportation costs. Inflation over the last 12 months has been very low and, as a consequence, the annual cost-of-living adjustment for Social Security recipients and other federal retirees will be only 1.3 percent, the smallest rise since 1987.

The Federal Reserve reported output in the nation's factories declined by three-tenths of 1 percent in September. This drop was the result of weakness in the manufacturing sector, especially in big-ticket goods. The decline was the third in the last four months. Industrial capacity in use also fell in September to 81.1 percent, from a revised 81.6 percent in August.

The slowdown in production contributed to the decline in average weekly earnings for workers. The Labor Department reported that average weekly earnings fell by the largest amount in 17 months -a decrease of six-tenths of 1 percent in inflation-adjusted earnings.

(Updated November 11, 1998)

1. Using aggregate supply and aggregate demand diagrams, show how a decrease in aggregate demand could lead to a slowing of the rate of inflation.

2. What does the consumer price index measure?

3. When comparing changes in average weekly earnings over time, why is it important to adjust for changes in inflation?

Source Bloomberg News, "Output Slows and Consumer Prices Are Steady", The New York Times, October 17, 1998.

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