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March 17, 2002
"The amazing strength of the American economy, despite the recession, has economists scrambling for explanations. Consumer resilience is much cited. So is price cutting. Who can resist a bargain, even in hard times? Less noticed, but crucial, is the boost that came from a declining inflation rate. Consumer spending, price cutting and lower inflation are interrelated, of course. But focusing on inflation produces a forecast of what might happen next to the economy that is different from the standard fare. Most forecasters are bullish: the recession, the 10th since World War II, is on its way out. Period. Focusing on inflation would also lead people to be bullish, but with less certainty."
" . . . the Consumer Price Index fell precipitously to an annual rate of 1.1 percent in January from 3.2 last June. Rarely has inflation fallen that much, so quickly. Wages went in the opposite direction. Despite the recession, companies kept giving raises. . . . 'Real' wages — actual purchasing power, or wages adjusted for inflation — rose in the fourth quarter by a greater percentage than in any quarter since the boom years of the 1990's. No wonder that consumer spending has been so much greater than anyone had expected."
"Business was also helped by lower inflation. Most of the decline came from the sharp drop in energy prices. Energy is a big cost of production . . . "
"There were other contributions to the surprising economic strength. Tax rebates helped. Mortgage refinancing, made possible by falling interest rates, freed cash for family spending. Mild winter weather aided home construction. Rising labor productivity — maintaining production levels with fewer paid hours of work — lowered costs. Even without a stimulus bill, government spending rose, particularly for the military, adding unexpectedly to economic growth. But the plunge in the inflation rate appears to have made the single biggest contribution . . . "
"THE torpedo in this chain of events would be rising inflation, compounded by the end of mortgage refinancing and the absence of additional tax rebates. And the inflation rate might rise. It fell mainly because energy prices fell, and lately oil has started up again."
"The next stage for the American economy, in other words, is still a cliffhanger." ... [more]
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