Inflation Up 4.4% in 1987, the Fastest Pace in 6 Years : Dollar Fall, Fuel Rise Get Blame

Consumer prices, climbing at their fastest pace in six years, rose 4.4% in 1987, the government said today. At fault were rebounding energy costs and the plunge in the value of the dollar.

Worse yet, last year’s inflation was four times the 1.1% rate posted for 1986. Still, the gain in the Labor Department’s Consumer Price Index was considered moderate by most economists and fell far below the double-digit inflation rates that ushered in the 1980s.

One piece of good news: Retail prices ended the year on a modest note, up just 0.1% in December, the smallest monthly gain since July, 1986. The index, based on a hypothetical selection of goods and services, had risen 0.3% in November and 0.4% in October.

Energy Cost Rebound

While the rate for 1986, the lowest in more than two decades, had been paced by the collapse in world oil prices, much of the 1987 increase reflected the partial rebound in energy costs.

Energy prices rose 8.2% in 1987, regaining a portion of their 19.7% 1986 loss.

For the year, gasoline prices were up 18.6%, heating oil costs gained 12.9%, and natural gas and electricity charges were up 0.3%.

Food and beverage costs were up 3.5% for 1987, compared to 3.7% for 1986.

Minus the volatile food and energy categories, prices for consumer goods rose 3.5% in 1987, compared to 1.4% in the preceding year.

Several Factors Noted

“The inflationary process moved into full swing in 1987, started by higher oil and energy prices, rising food prices, the effects of a lower dollar and increases in services prices,” said Allen Sinai, chief economist for the Boston Co. Economic Advisers. “Once inflation starts in the U.S., it usually is not interrupted until a recession.”

But other analysts were not overly concerned.

“It was just the energy prices coming up from the abnormally low level of 1986,” said David Wyss, an economist with Data Resources Inc., an economic consulting company in Lexington, Mass. “The overall picture is very stable for inflation.”

The rise in goods minus food items and energy reflects the dramatic fall in the dollar’s value during 1987. Over the year, the dollar lost 25% of its value against the Japanese yen and 20% against the German mark.

Highest Since 1981

Overall, consumer prices last year showed the highest rate of inflation since 1981, when it was 8.9%. With the exception of last year’s surprisingly low pace, inflation has ranged from 3.8% to 4.0% since 1981.

The stepped-up retail-price inflation rate is likely to play a key role in upcoming negotiations for labor contracts that include cost-of-living features.

For Social Security recipients, however, inflation has already been take into account. Beginning with this month’s checks, recipients are receiving 4.3% more, a figure derived from changes in prices from September, 1986, through September, 1987.

Service Prices Up 4.4%

Service prices as a whole rose 4.4% in 1987, up from 4.3% in the previous year. The service price gains last year included a 5.8% rise in medical care and a 4.0% rise in entertainment costs.

If December’s 0.1% inflation rate persisted for 12 straight months, the yearly inflation rate would be 1.4%.

In a separate report today, the Commerce Department said housing starts plunged 16.2% in December, the steepest monthly decline in more than three years.

The department said the weakness in December helped drag down housing construction for the entire year to 1.62 million units, the poorest showing for the housing industry since the recession year of 1982.