Economy, Inflation Rise in 2nd Quarter : Price Index Grows at Fastest Pace in Nearly 6 Years

The U.S. economy expanded at a healthy 3.1% annual rate from April through June, but inflation shot up at the fastest pace in almost six years, the government reported today.

The Commerce Department said growth in the gross national product, the broadest measure of economic health, was down only slightly from a 3.4% rate in the first three months of the year.

Inflation, however, picked up substantially during the spring, with a price index tied to the GNP climbing at an annual rate of 4.7%, the biggest advance since a 5.5% rise in the third quarter of 1982.

This inflation index, which measures a fixed selection of goods, had risen at a 3.5% rate in the first quarter.

Goods Cost More

Today’s report blamed higher costs in a wide range of consumer goods for the pickup in inflation.

White House spokesman Marlin Fitzwater said: “The report shows the economy continuing to grow at a moderately healthy pace in the first half of the year, with some slowing more recently. Investment is strong, the real trade deficit is narrowing, and slower growth of domestic demand bodes well for future improvements.”

As to concerns about inflation, Fitzwater said, “Inflation remains low and under control; there are moderating influences in the last several months that indicate steady growth, but without a return to inflation.”

While the U.S. economy is performing substantially better than had been expected at the start of the year, the more robust growth has triggered inflation fears.

Interest Rates Could Rise

Recently, Federal Reserve Chairman Alan Greenspan warned that if economic activity did not slow in coming months, the central bank was prepared to dampen demand by pushing interest rates up further. Economists worry, however, that if credit is tightened too severely it could trigger a recession next year.

But Michael Evans, head of a Washington forecasting firm, said he was not overly concerned by the rise in inflation. He said most of the price pressure came in increases for clothing and energy early in the spring. He said those gains have since been reversed.

“I don’t think this is a sign that we will have higher inflation ahead,” he said.

Today’s GNP report was accompanied by benchmark revisions in GNP data over the last three years, part of an annual review to update the data to reflect new information.

Consumers Spent More

The revisions substantially boosted growth last year to an annual rate of 3.4%, largely because of higher consumer spending. The earlier estimate had put GNP growth last year at 2.9%.

Because the economy grew at a 3.25% annual rate in the first half of this year, growth could dip as low as 2.7% in the second half of the year and still meet the Administration’s 3% growth target.