Current Economy

Understanding the economy and coping with the economic environment is critical in today's business performance, which is a major concern for managers, investors, and the nation as a whole.

Most everybody these days can point to their own list of rising expenses. Electricity, air travel, medical care and even staples such as diapers cost more. Rents are jumping as the housing boom cools, just as property taxes are soaring to reflect the price appreciation of the hotter days.

Plus, interest charges are rising on credit card balances, home-equity lines of credit and adjustable-rate mortgages. This is how it feels when the days of cheap energy and easy money give way to $70 barrels of oil and ascending interest rates. The economy may be strong, but many people are feeling pinched. Economists say that feeling overshadows the fact that inflation overall is relatively low running at a 3.4 percent annual clip, the same rate as all of last year. The Federal Reserve has been raising interest rates for nearly two years to control inflation, and it is likely to again boost rates this week (Moody).

The rate increases were intended to slow a frenzy of consumption that built over the first half of this decade, when government policymakers used tax cuts and low interest rates to prod consumers to keep spending through a recession and the sluggish economic recovery that followed.

Consumers responded enthusiastically, snapping up autos, fueling a housing boom and splurging as a wave of mortgage refinancing turned rapidly appreciating homes into cash machines.

Higher interest rates, energy prices and other expenses are now causing some consumers to rethink their spending habits. So far, many families have been able to absorb the increases without having to tighten their belts much. But others have started to adjust to the new reality.

Many people wonder how the Fed can say inflation is largely contained when their day-to-day costs seem to be rising. The explanation lies in the difference between an economist's technical definition of price inflation and an individual consumer's sense of the overall cost of living.

Economists view inflation as the rate of increase in the general level of prices for goods and services. That's the net result after combining both rising and falling prices. And it doesn't include income taxes or the interest consumers pay on what they borrow.

Consumers, though, tend to notice rising prices for things they buy frequently -- such as gasoline and food -- more than falling prices, particularly for items they don't buy as often, such as personal computers and phone service. And many consumers have boosted their household expenses over time by tacking on additional monthly bills that didn't exist decades ago, for cell phones, cable television, DVD rentals, sports clubs and Internet access.

Inflation did pick up last month, according to the Labor Department's consumer price index, which rose 0.4 percent in March after edging up just 0.1 percent in February. Much of the recent increases have reflected surging energy prices, which rose 17.3 percent in the past 12 months (MSNBC). But prices rose as well for food, housing, medical care and education, the Labor Department reported (CNN).

The Fed seeks to keep inflation under control and unemployment low by using interest rates to guide the economy's pace of expansion. When the economy slumps, the Fed lowers rates, making it cheaper for consumers and businesses to borrow and spend, spurring economic growth and hiring. When the economy grows too rapidly, the Fed lifts rates to achieve the opposite effect.

So while consumers may see higher debt charges now as just another rising expense, the Fed regards them as necessary medicine to prevent the worse disease of broader, persistent inflation, like the kind that reached into double digits in the 1970s. After all, last year's consumer price index rate was the highest in five years.

Fed policy, however, can't control the price of oil, which is set by global markets largely on the basis of supply and demand. To better gauge what's happening in the rest of the economy, economists look at so-called core price measures, which exclude food and energy, for a sense of underlying