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June 1995, Vol. 118, No. 6
A s measured by the Consumer Price Index for All Urban Consumers (CPI-U), inflation was moderate in 1994. The CPI-U increased by 2.7 percent, the same as in 1993, keeping inflation below the 3-percent level for 3 consecutive years. This is the first time since December 1965 the index has remained stable for such an extended period.
The CPI for all items less food and energy, often referred to as the core index, or underlying rate of inflation, increased 2.6 percent in 1994. This was its smallest annual increase since 1965, when the index rose just 1.5 percent. The deceleration in the index for all items less food and energy, which has continued since 1990, has contributed to moderate retail inflation over the past 4 years. (See table 1.)
The economy continued to expand in 1994. Consumer spending and real disposable income rose, and unemployment fell. The Federal Reserve Board maintained its goal of noninflationary price stability by raising the discount rate and Federal fund rate three times each in 1994. (The discount rate is the interest rate the Fed charges for loans to banks.1) The Federal Reserve Board's Open Market Committee cited increases in commodity prices and capacity utilization rates, a measure of plant stress in manufacturing, mining, and utilities. Utilization rates rose to 84.9 percent of total capacity in December, the highest since May 1989.
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1 This was the first time the discount rate had increased since it reached a nominal level of 3 percent in July 1990.
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