South-Western College Publishing - Economics  
The Forecast for May is Calming
Subject Economic Growth and inflation
Topic Productivity and Growth
Employment, Unemployment, and Inflation
Key Words Inflation, Economic Growth, Consumer Price Index, Index of Industrial Production, Index of Consumer Confidence
News Story

After a sharp rise in April, the Labor Department reported that consumer prices were unchanged for the month of May, calming fears that the data for April reflected a significant increase in inflation. Wall Street reacted to the May Consumer Price Index (CPI) report by an increase of about 190 points in the Dow Jones industrial average. Yields on 30-year U.S. Treasury bonds responded to the CPI report by falling. The May CPI data makes it less likely that the Federal Reserve will increase interest rates at the end of June.

According to the Labor Department, the CPI was unchanged in May from its April value and the core rate of inflation, which excludes volatile food and energy prices, rose one-tenth of 1 percent. The components of the CPI, gasoline, apparel, lodging away from home, airline fare, and tobacco, which had caused the seven-tenths of 1 percent jump in April, all declined in May. New and used car prices, housing costs, and computer prices also fell. Also of importance is the moderation of the rate of increase in the price of medical care. Inflation over the last 12 months has been 1.7 percent.

Many believed that April's CPI increase was an anomaly. May's CPI figure has bolstered that belief and has likely caused the Federal Reserve to wonder about its course of action. Of course, the Federal Reserve is more concerned what the CPI will do 6 to 12 months from now than with the current CPI value. U.S. economic growth has averaged 4 percent a year for the past three years. Growth rates of 4 percent historically have not been consistent with little or no inflation. But job growth is slowing and economic forecasters are predicting somewhat slower growth in the second half of this year. There appear to be few bottlenecks or shortages that would cause prices of industrial products to rise. For example, the Fed reported that the nation's industrial capacity was 80.5 percent last month.

(Updated July 1, 1999)

1. What does the Consumer Price Index measure? How is it calculated?
2. The article states that the news of no inflation in May caused the stock market to increase and the yield on U.S. Treasury bonds to fall. Why did the stock market react the way that it did? Why did the yield on U.S. Treasuries fall?
3. What is the core rate of inflation? Why is the core rate considered to be a better indicator of the underlying rate of inflation?
Source John M. Berry, "Inflation Rate Steady in May;" The Washington Post, June 17, 1999.

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