U.S. Inflation Slows for 2nd Month in Row : Consumer Prices Up 0.3% in May; Drought Effects Not Yet Felt

Inflation slowed for the second month in a row to an annual rate of 4.2% in May, the government said today, with the effects of the Farm Belt drought yet to show up on supermarket shelves and a recent upward spiral in clothing prices coming to an end.

The Labor Department said the consumer price index climbed a modest 0.3% in May after rising 0.4% in April and 0.5% in March.

Food prices rose just 0.4%, compared to a 0.6% increase in April. Analysts said the only area where the effects of the drought showed up were in higher retail prices for vegetable oil and mayonnaise.

The biggest price increase was for gasoline, up 1.7% after a 1.1% increase in April. Gasoline prices, however, are still just 2.9% higher than they were a year ago.

Auto prices rose 0.2% last month with the paring of many dealer incentives.

Same Pace as in ’87

“It was pretty low compared to expectations,” John Hagens, an analyst for the Wefa Group, an economic consulting firm in Bala Cynwyd, Pa., said of the price report. “The food picture hasn’t really passed into the CPI yet.”

For the first five months of 1988, overall retail prices have risen at an annual rate of 4.4%, the same pace at which they grew in 1987, the government said.

Treasury Secretary James A. Baker III said last week that the Reagan Administration remains optimistic that its targeted inflation cap of 4.5% for 1988 will not be exceeded.

However, low unemployment-spurred wage gains that have been outpacing price increases over the last three months plus anticipated future food price hikes from the current drought in the Farm Belt have triggered fears of an inflationary wage-price spiral later this year or in early 1989.

Leading the food price increases in May were gains for meats, poultry, fish and eggs, up 0.8% compared to a 1.4% rise in April. Price increases for fruits and vegetables also slowed from their 1.4% rise in April to 0.6% in May.

Medical Costs Up 0.7%

The increases for other food and beverages were one-half of 1% or less.

“The drought and major hikes in commodity prices that we’re seeing are scary, but it’s just too soon for them to have reached the retail market,” said Sandra Shaber, an economist for the Futures Group, a Washington consulting firm.

Medical costs jumped 0.7% in May and are now 6.4% higher than they were a year ago, making them the single biggest propellant of inflation in the consumer price index.

But prices for women’s clothing, which had skyrocketed a total of 7% in March and April, fell 0.4% last month.

“Apparel prices have softened, and the large increases there are over,” Shaber said. “There’s a lot of stiff consumer resistance out there. Retailers already have put the stuff on sale.”