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December 28, 2001

Inflation: The Non-Story of the Year

The U.S. economy of the 1990's was anything but humble. Stock prices were high, unemployment levels were low, and business paperbacks gushed about the possibilities of a Dow Jones Industrial Index of 30,000 and an end to business cycles. The folly of those words today, ten months into a recession, is manifestly evident. We all know now that the U.S. economy can't quite roll over every obstacle in its path the way it seemed it could a few short years ago.

Job growth has sputtered badly in the last several months, particularly in manufacturing, where almost 1.1 million jobs have been lost in the space of 12 months. But job growth was only part of the U.S. economic miracle that propelled us to such dizzying heights over the last ten decade. The other half of the equation -- very low levels of price inflation – is still very much in evidence all around us. And now that our brief scare with energy price spikes is behind us, the prospects for continued mild inflation appear to be excellent.

Even though most producers of goods and services would like to raise their prices, the simple truth for many of them is that they simply cannot do so. The strong dollar, overproduction and sluggish demand, coupled with plummeting energy prices, has fostered an environment where raising prices is simply not a feasible option.

Consider, for example, the plight of a company like Ford. Once flush with cash and mounting a credible threat to overtake General Motors in the U.S. passenger car and truck market, the number two automaker finds itself losing both money and market share. Its mid-sized Taurus, once the nation's best selling car, faces off in the market place against the totally redesigned Toyota Camry, which now wears that mantle. Thanks in part to the weak yen, the redesigned Camry sports a sticker price that is nearly $1,000 less than the older model.

These individual stories of cut throat price competition are reflected in the national data. The consumer price index for new motor vehicles stood in November at exactly the same level it was at in November 2000 – zero inflation over the twelve month period. The situation in the new car market has even affected used cars, whose prices fell by 1.2 percent over the last twelve months.

But if companies are crying the blues over their inability to raise prices, the situation with many of their suppliers is just as grim. Thanks to a global overcapacity severe enough to bankrupt a company like LTV, the price of steel has sunk to very low levels, saving appliance, machinery, and vehicle manufacturers millions of dollars. And almost everyone, except perhaps those in the petroleum industry, is breathing a sigh of relief over the plunge in energy prices.

One of the few sectors of the economy that is experiencing anything close to real inflation is medical care. But even though the prices of medical commodities and services have accelerated slightly in 2001, their current 5 percent annual pace is high only in comparison to an overall inflation rate of 1.9 percent. Moreover, the rapidly rise in quality of new procedures and medicines makes it very difficult to assess how much of this increase is pure inflation and how much represents an upgraded product.

As far as our economic recovery is concerned, its hard to imagine a more favorable price climate than what we are experiencing right now. The low, stable prices in most sectors of the economy remove an element of uncertainty to almost every business plan. And while it will take more than low inflation to get the U.S. economy growing again, its not a bad place to start.

Link to this commentary: https://commentaries.cberdata.org/443/inflation-the-non-story-of-the-year

Tags: prices and inflation, economic recovery


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.

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