But the greater surprise was the decline in core inflation. A major source of this error was the unexpected further appreciation of the dollar and thus the renewed decline in import prices. The dollar had been expected by many to stabilize in 1997.
Instead, it appreciated sharply, by 11½% based on the multi-lateral trade weighted index of other G-10 currencies and by even more for broader indexes that include other major trading partners. Continuing sharp declines in computer prices and the failure of medical benefit costs to rebound also contributed to the surprisingly favorable inflation outcome.