Prices in Sharpest Drop for 3 Months Since 1954 : But 0.4% March Decline Is Discounted Because It Was Mainly Caused by Collapse of Oil Costs

Consumer prices fell 0.4% in March, marking the second decline in as many months and capping the largest three-month price decline in more than 30 years, the Labor Department reported Tuesday.

At the same time, the Commerce Department said that March orders for manufactured durable goods, an important indicator of future economic expansion, fell a steep 2.5%, disappointing economists who had expected stronger growth this quarter.

However, in a positive sign for the economy, a Labor Department report said that real average weekly earnings increased 1.2% for the month, the best such increase since February, 1984.

Up 0.5% in L.A. Area

If unadjusted for seasonal changes, the consumer price index nationwide fell 0.5% in March, a figure that represents the average for cities across the country. But in the greater Los Angeles-Anaheim-Long Beach area, the unadjusted March consumer price index increased 0.5%, an unusual variation from the national average.

The Labor Department warned, however, that statistics for individual cities are often volatile and should not be used as a true measure of inflation.

The astonishing free-fall in prices so far this year--putting inflation at a negative 1.9% annual rate during the January-March quarter--was the biggest three-month period of deflation since 1954.

Normally, such a record would spur elation among those who fear inflation or terror among those who expect recession. But, because the drop was caused almost entirely by the global collapse in oil prices that has dominated worldwide economic currents since the beginning of the year, the price decrease was in part discounted as expected and probably transitory.

Economists were quick to point out that, without the oil factor--which has led to a price drop for all energy commodities of 16.9% since January, the equivalent of a 52.3% decline at an annual rate--consumer prices would have increased 0.3% in March.

That approximates the 4% annual inflation rate the economy has experienced in the last few years, which is believed by economists to be the current “underlying rate” of inflation.

“When we get to the end of the oil price drop in a few months, we’ll be back to the 4% rate,” said Donald Ratajkczak, director of the economic forecasting project at Georgia State University. He said that most of the upward pressure on prices remains in the services sector of the economy, especially medical expenses, where inflation has for several years outstripped price increases in the economy as a whole.

Ratajkczak suggested that sharply higher insurance premiums, the result of the current explosion in liability claims and judgments, may have been a factor in driving up those prices.

Decreasing Dollar

Irwin Kellner, chief economist at the Manufacturers Hanover Trust bank in New York, expressed concern that the rapidly decreasing dollar is beginning to drive up the price of imported goods, thereby planting seeds of future inflation.

Kellner also cited “a clear acceleration in medical costs, especially physicians’ fees.” The consumer price index for medical care for March rose a full percentage point, in sharp contrast to declines elsewhere in the index. During the January-March quarter, medical care rose at an 8.9% annual rate.

By comparison, Kellner noted, the 12-month increase from March, 1985, to March, 1986, was 7.4%; from December, 1984, to December, 1985, was 6.9%, and from December, 1983, to December, 1984, was 5.8%. Clearly, he said, the medical cost trend is rising sharply, even as overall inflation remains low or falling.

Ratajkczak and Kellner predicted that the oil price collapse will continue to drive prices lower at the retail level for at least another month.

Gloomy Forecasts

But, beyond that, their forecasts turn gloomy. The larger trend toward higher prices in services--the one area of the U.S. economy that is booming--should bring back higher prices by summer. “So enjoy the declines while you’ve got them, because they won’t go on much longer,” Kellner said.

Robert Gough of Data Resources Inc. in Lexington, Mass., while for the most part dismissing the price declines as a transitory phenomenon, expressed concern about the decline in durable goods orders. The 2.5% decline occurred despite an enormous 42.5% jump in the volatile category of defense orders--which fell 30.4% the month before and rose 44.5% during the month before that.

If the defense increase is excluded, the Commerce Department noted, orders for durable goods destined for the private sector economy dropped 5.7%. If further volatile categories such as orders for aviation equipment are removed, demand for goods that Gough defines as “consumer-related” fell by 3.5%.