Increase in Inflation: Cause for Concern?

Chart of the Week for September 17-23, 1999

Inflation at the consumer level, measured by the Consumer Price Index (CPI), rose 2.3% for the year ending in August 1999. This is an increase of nearly 44% over the 1998 rise of 1.6%. A simplistic explanation would be that the continued flourishing of the economy is pushing prices higher. However, that’s not the case. Most of the increase in the overall CPIhas come from a rebound in energy prices.

Energy prices are notoriously volatile, and can whipsaw the overall CPI. As the chart above shows, prices for all CPI components except energy have steadily drifted below 2% over the past five years. Energy prices, on the other hand, are up 7.2% for the year ending in August 1999 after dropping significantly in 1998.

Many market watchers believe that without evidence of broad-based price increases, the Federal Open Market Committee will have little reason to raise interest rates when they meet again on October 5.

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