Inflation Stays Low as Prices Rise Only 0.2%

Retail prices rose only 0.2% in August, for the fourth consecutive month, a pace that could keep the year’s inflation rate well below 4%, the government announced Tuesday.

Inflation continued to be held in check by lower food and energy prices, only in part offset by higher prices for housing and medical care, the Labor Department said in its monthly report on consumer prices. So far in 1985, inflation has run at an annual rate of 3.3%--which, if sustained, would be the lowest such increase since 1967.

In the Los Angeles-Long Beach-Anaheim area, consumer prices rose 0.8% last month, spurred primarily by higher housing costs. Over the last 12 months, inflation in the area has been 5%, above the national average.

Surge in Defense Orders

At the same time, the Commerce Department offered another piece of evidence that the economy began a modest pickup during the summer when it reported that a surge in big-ticket defense orders pushed durable goods orders ahead by a healthy 3.4% last month. Last week, it forecast that in the third quarter the economy had grown at a 2.8% annual rate, an unspectacular pace but an improvement over the glacial growth recorded earlier this year.

Economists reviewing the day’s reports were particularly encouraged by the lengthening record of low inflation, saying that for many months no economic fundamental has changed that would reignite inflationary expectations.

“We just don’t think inflation is going to be a concern,” said Robert Gough of Data Resources Inc., a Lexington, Mass., economic forecasting firm.

Gough said he saw some risk of higher prices “if the dollar falls precipitously” in response to an effort by the United States and four other major industrial nations to bring down its value compared to other currencies.

Since 1980, the soaring dollar has been a key factor in taming what had become endemic inflation. But Gough and other economists seem to agree that a weaker dollar will be felt only gradually in the prices of imports--and, therefore, later on in the prices of U.S.-made goods.

Dollar Down 5%

Donald Ratajczak, a Georgia State University economist who specializes in wholesale and retail price changes, said that, to affect prices, the dollar would have to fall substantially more than the 5% it did Monday.

“We’re going to have to watch the dollar, but the 5% this week shouldn’t have any significant impact,” he said. “Imports have been priced just below the dollar price, not a whole lot below, for fear of getting import quotas slapped on, so some imported goods have been running up huge profit margins.”

Ratajczak said that the dollar would have to lose as much as 15% of its value against other currencies before import prices would be affected.

Robert F. Wescott, an analyst with Wharton Econometrics, said: “The CPI (consumer price index) is really good news, month after month. As you look down the price pipeline to low commodity prices and so forth, it’s a very moderate inflation you get from it all.”

As for the impact of a weaker dollar, Wescott said he believes that “the inflation impacts of that are way overstated.”

Meanwhile, economists said that the 3.4% increase in durable goods orders last month was the minimum needed to keep the economy moving on its modest growth track. But, without the huge 12.5% leap in the defense component, the Commerce Department noted, the rise would have been a far more modest 2.5%.

Surge in Auto Sales

Much of the remaining increase was fueled by a big jump in transportation equipment, in turn spurred by the late-summer surge in auto sales.

Nevertheless, the durable goods report remains “a very positive development,” Wescott said, adding: “The auto sector is going great guns now, and I think it’s more than just a flash in the pan.”