Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.

Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.

Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.

Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.

View archives

Top Tags

jobs and employment 230
economics 178
education 148
economic development 146
state and local government 129
taxes 123
finance 109
indiana 105
migration and population change 104
budget and spending 104
Browse all tags
Reporter / Admin Login

February 8, 2002

Recipe for Low Price Inflation

What do you get when you mix a strong dollar, a recession, and an unexpected surplus of crude oil production? In the national economy, the result is all around us: very low rates of price inflation. Not every sector of the economy is participating equally in the price freeze, and there is some question as to how long it will last. But a casual glance at the data reveals the remarkable fact that the growth in prices in general across the economy has practically stopped.

In the fourth quarter of 2001, the Consumer Price Index actually fell at a 0.4 percent annual rate in the national economy. In the forty years prior to the close of last year, negative growth in CPI over a quarter has only happened twice. And that remarkable performance comes on the heels of a July-September period that saw prices only edge up at a miniscule 0.7 percent annual rate. For companies that operate on a July fiscal year, that means that even a resumption of the "normal" upward creep in prices will likely produce a 1.5 percent rate of inflation for the year.

Not all prices in the economy are moving in the same direction, of course. The dominant force behind the sudden drop in overall prices has been the downward spiral of energy prices, led by oil. Motor fuel prices fell by 6 percent in December alone, and now stand almost 25 percent lower than they were a year ago. Those declines show up directly as reductions in housing and transportation costs, and indirectly in cost savings for a wide range of manufactured products.

On the other hand, the health care sector is marching to a different beat. Medical care prices increases have continued in the 4 to 5 percent range throughout last year. This rate, of course, understates the increase in health care spending, which is also driven by rapidly rising demand.

But outside of health care, the stars and planets seem to be aligned perfectly to reign in price inflation. The recession has simultaneously depressed demand and injected some slack into labor markets that had only recently been stretched very tight. The strong dollar has given imports pricing power leverage that has been a huge headache for domestic manufacturers, but a bonanza for bargain-conscious consumers. And a surprisingly strong productivity report on the U.S. economy suggests that businesses are still finding ways to cope with a competitive environment that effectively strips them of their pricing power.

The news that output-per-hour of the American workforce rose at a 3.5 percent rate in the final quarter of 2001 is surprising on at least two counts. In a recession, productivity typically dips as companies seek to keep their skilled workforce intact even as sales dip, in anticipation of a business pickup. Moreover, the severe drop inbusiness spending on plant and equipment suggests that modernizing plans are being put on hold. The increased productivity gives businesses breathing room to remain financially viable even as revenues are hit by the recession and foreign competition.

There's still plenty to worry about on the inflation front in the near future, however. The instability of oil supplies, the rapid rise in government spending, and the return of budget deficits are only a few items to make policymaker's brows furrow. But, for now at least, low price inflation has arrived, and it may be staying with us for a while.

Link to this commentary: https://commentaries.cberdata.org/437/recipe-for-low-price-inflation

Tags: prices and inflation, recession, finance


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close