U.S. Reports 1.1% Inflation Rate for 1986--the Lowest in 25 Years

The U.S. inflation rate rose only 1.1% last year, the Labor Department said Wednesday, prompting the White House to declare that “inflation took its worst beating in 25 years.”

Several private economists, noting that an unexpected 19.7% plunge in energy prices had played a major role in dampening inflation, predicted that in 1987 the rate would climb back to the 4% level of the 1982-85 period.

“Gasoline prices are heading up, and I don’t think we’ll be as lucky with oil prices this year as we were in 1986,” said Martin Mauro, a Merrill Lynch economist. “Also, we should see a rise in prices of imported goods and their domestic counterparts because of the weaker dollar” in world trade, he said.

Will Be Held in Check

Nevertheless, Mauro added, “I think that, overall, inflation will be held in check in 1987.”

Consumer prices in Los Angeles and Orange counties dipped in December but they rose at almost twice the national rate for all of 1986.

The bureau reported that prices paid for goods and services purchased by Los Angeles and Orange County consumers fell 0.3% in December from November when prices fell 0.7%, according to Sam Hirabayashi, the bureau’s regional commissioner. The December decline reflected lower prices for all categories of consumer spending except medical care and food and beverages.

For all of 1986, however, the inflation rate for the two Southern California counties rose 2.1%, compared to the 1.1% gain in prices nationwide. Although prices rose at a faster clip, the rate inflation in Los Angeles and Orange counties was less than half the 4.8% increase in 1985, and was the lowest since 1982. Housing costs were down 0.6% in December, but were up 4.7% for the year.

The 1.1% increase in the consumer price index was the smallest since 1961, when prices rose just 0.7%.

Without the steep fall in oil prices last year, the inflation rate would have risen 3.8% instead of 1.1%.

In December, when gasoline prices began to climb as the Organization of Petroleum Exporting Countries ended its price war, the index rose a 0.2% over the previous month.

White House spokesman Marlin Fitzwater expressed the Reagan Administration’s pleasure Wednesday not only with the low 1986 inflation rate but with news of a 13.7% jump in housing starts last month that helped give the industry its best year since 1978. The Commerce Department said construction began on 1.81 million homes and apartments in 1986 as mortgage rates fell to their lowest levels in this decade.

“With inflation reined in, unemployment down to 6.6% and the stock market setting dizzying new highs each day, Americans have good reason to feel confident that 1987 will be another banner year for the Reagan economic expansion,” Fitzwater said in a statement.

While energy costs dropped nearly 20% last year, food prices increased 3.8%, largely reflecting an upturn in meat and poultry prices. Shelter costs rose somewhat less than in previous years, increasing 4.6%. All other items went up a combined 3.4%.

Georgia State University economist Stacy Kottman called last year’s inflation rate “extremely extraordinary,” and Doug Handler, a senior economist at Wharton Econometrics in Philadelphia, termed it “quite fantastic.” However, Handler agreed with his colleagues that the 1986 rate was “a blip in the statistics” because of the sharp drop in oil prices as well as lower commodity costs.

The 13.7% jump in housing construction last month worked out to a seasonally adjusted annual rate of 1.80 million units. It was the first monthly increase since August and the biggest monthly advance in a year.