11/19/2004

Consumer Prices on the Rise

I know that this is more of a macro subject, but it caught my attention. Consumer prices rose by 0.2% in October, much greater than was expected. The rise was due mostly to high energy and food prices. The question is whether this will continue and what will be the outcome for the U.S. About a week ago, the FOMC raised the short-term interest rates to 2%, and many economists speculated that this would be a "rest stop" to the let the economy gain even more traction before raising the rates again. Now that with the news of price level on the rise, the FOMC may be forced to raise the interest rate again in December to prevent inflation.

The economy is growing stronger as unemployment rates are dropping, but it isn't as strong as we would like to see it. This could be bad news for the U.S. if interest rates go up to battle inflation because it could reverse the progress we have made recently. Income and spending could go down, and unemployment could go up again. Hopefully the price level subsides and things continue to improve.

2 comments:

Maudi said...

Interest rates are definatly going to go up. It is important for the consumer to remember that as interest rates go up there is always opportunity. There is no question that with the price of fuel going up all goods must to go up. The reason for this, especially in UTAH is that we rely heavily on the trucking industry to bring us our goods. The cost of living is somthing that will always be rising there will always be some key factor that is causing the costs to go up. Fuel I feel is somthing that is highly demanded and people will continue to pay the higher gas prices until they feel they can no longer afford it.

Dr. Tufte said...

-1 for spelling mistakes in Maudi's comment.

People pay way too much attention to these monthly changes. We're supposed to be worried about a change of 0.2% being too large in a number that is only measured to tenths of a percent. This implies that it would have been better if it was a 0.1% change. But is this large enough to really matter?

What we really need to be looking at is something like inflation over the last 6 or 12 months, and a series of several months observations of that to get a sense of whether we are going up or down.