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Not Much "In" In Inflation
Subject Inflation
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Consumer Price Index, Interest Rates, Federal Reserve
News Story

In a somewhat surprising announcement, the Labor Department reported that for the first time in 14 years consumer prices actually fell in August. The Consumer Price Index (CPI) fell 0.1 percent in August compared with the July level. The primary cause of the decline was an unusually large drop in the price of energy. Energy costs were down 2.9 percent for the month, with gasoline prices dropping 6 percent. The core inflation rate, that is the CPI excluding the food and energy sectors, increased 0.2 percent, the fifth consecutive month of an increase of this magnitude. The drop in energy prices is temporary. The price of oil has risen in September to a 10-year high.

The core inflation rate has increased 2.5 percent over the past 12 month. Although this is higher than the 1.9 percent rate recorded for 1999, most analysts do not expect any action from the Fed. The Fed has raised interest rates six times from mid-1999 to May of this year in an effort to prevent economic growth from triggering excessive inflation.

There are inflationary pressures in the economy. Medical services have jumped 5.2 percent in the past three months, compared with 3.3 percent for September through November 1999. Inflation for all non-energy services was 3.8 percent for the latest 3 months - an increase from the 3.1 percent for the previous six months.

Gasoline prices dropped 6 percent in August, the largest monthly decrease since 1991. The last time the CPI declined was in 1986. That decline was also tied to energy prices - it was attributable to a collapse of world oil prices.

(Updated October 1, 2000)

Questions

1. What happens to the purchasing power of the dollar when inflation increases? When inflation decreases?
2. What are some of the factors to explain why a sector like medical services reports a much higher level of inflation than another sector like housing? Why are some sectors more important than other sectors when calculating the rate of inflation?
3. Prices in the New York metropolitan area rose 0.2 percent in August while Los Angeles prices rose 0.3 percent and Chicago prices fell 0.5 percent. What accounts for these differences?

Source Robert D. Hershey, Jr., "August Inflation Fell on Short-Lived Drop in Energy Prices;" The New York Times, September 16, 2000.

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