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U.S. Enjoys Fourth Year Of Low Inflation Smallest Rise In Health Costs In 23 Years Helps Hold Inflation To 2.5 Percent In 1995

Fri., Feb. 2, 1996

Consumer prices rose just 2.5 percent in 1995, helped by the smallest increase in health costs in 23 years. It was the nation’s fourth straight year of moderate inflation, the best run since the 1960s.

Analysts said the exceptional news on inflation, plus new signs of economic weakness, would provide fresh incentives for the Federal Reserve to cut interest rates further.

“The inflation number is very non-threatening,” said Robert Dederick, chief economic consultant at the Northern Trust Co. of Chicago. “Today’s risk is an economy that does not have enough juice, not one that has too much.”

The Labor Department reported Thursday that inflation for December rose just 0.2 percent despite a temporary jump in energy costs, leaving prices for the year up by the smallest amount since 1986.

The 1995 price moderation was viewed as remarkable, coming in the fifth year of an economic expansion. It marked the first time since 1965 that inflation had been below 3 percent for four years running.

One major contributing factor was restraint in medical prices, which just a few years ago were increasing at double-digit rates. For 1995, medical costs such as doctor and hospital fees rose just 3.9 percent, the smallest advance since 1972, with the growth of managed care given much of the credit.

The report came a day after the Federal Reserve trimmed interest rates by a quarter-point, the third easing move in the past seven months. Many economists said widespread signs of weakness in such interest-rate sensitive sectors as housing, consumer spending and manufacturing would force further rate cuts.

The National Association of Purchasing Managers said Thursday that its closely watched index of strength in manufacturing fell in January for the sixth straight month, dipping to 44.2 percent compared to 46.0 percent in December.

Any reading below 50 is generally viewed as signaling a recession in manufacturing.

Excluding volatile food and energy categories, prices were up just 0.1 percent in December. For the year, the so-called core rate of inflation registered a 3 percent gain. It was only the third time in the past three decades that the core rate was up 3 percent or less.

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