Fourth Steep Drop in Gasoline Costs Holds Retail Prices Steady : But 0.8% Increase in Food Category Hints Turnaround

Another steep decline in gasoline costs held consumer prices steady in July as Americans enjoyed the best news on retail prices in 37 years, the government reported today.

But the Labor Department said there were signs everywhere that the good news on inflation is ending. Food costs in July shot up at the fastest clip in more than two years, prices of medical services were up sharply and the cost of imported goods rose as well.

Without the big decline in energy prices last month, retail prices would have risen 0.5%, underscoring the belief of many economists that the underlying annual inflation rate is about 4%.

Still, the 27.4% plunge in gasoline prices this year has helped push overall consumer costs down at an annual rate of 0.2% for the first seven months of 1986. That is the best inflation performance since prices fell at a rate of 2.4% from January through July of 1949.

1.9% Seen for All of ’86

For 1986 as a whole, many analysts are predicting that the consumer price index will rise just 1.9%, giving the country the lowest inflation rate in more than two decades.

Inflation has to be at least 3% to trigger cost-of-living increases next year for the nation’s 37 million Social Security recipients. However, congressional leaders and the Reagan Administration have both pledged to waive the law and boost benefits about 2% next January.

The belief that prices will turn upward in coming months is based on a feeling that gasoline costs will start rising because of the agreement by members of the Organization of Petroleum Exporting Countries to cut production.

Additionally, economists say, the 30% drop in the value of the dollar, engineered by the Administration as a way to correct the country’s huge trade imbalances, will push the price of imported goods higher.

‘Inflationary Pressures’

“We are getting to the point where we will start to see inflationary pressures,” said Dorothea Otte, assistant director of the economic forecasting center at Georgia State University.

Otte predicted that the spot price of oil on the world market, now about $11 per barrel, will move up to $15 per barrel by early next year if the OPEC cartel is able to stick to its agreement to reduce daily production from 20.5 million barrels to 16.7 million barrels.

She said this increase would push gasoline costs up by 15 cents to 20 cents per gallon by early next year.

By contrast, gasoline prices fell 6.6% last month, the fourth time they have declined this year. Prices at the pump are now 35.7% below their 1981 peak.

Food Prices Up Sharply

Food costs, however, rose a sharp 0.8% in July, their biggest gain since January, 1984. All major food categories showed substantial increases, with the effects of a severe drought in the Southeast and the government’s dairy herd reduction program being felt.

Housing costs, which had risen 0.5% in June, held steady last month, largely a reflection of declines in the costs of electricity and natural gas.

While used-car costs continued a yearlong pattern of declines, dropping 0.5%, the cost of new cars rose 0.4%, reflecting in part sharply rising costs for imported cars, analysts said.

Medical care costs rose 0.5% as prices in this category continued to climb more rapidly than any other component of the price index.

In all, the consumer price index stood at 328.0 in July, meaning that goods costing $10 in 1967 would have cost $32.80 last month. This calculation, unlike the others, is not adjusted for normal seasonal variations.