Inflation Inches Up as Drought Hits Food Costs

Inflation continued its slow but steady rise in July as food prices, showing the first signs of impact from this summer’s drought, posted their sharpest increase in 4 1/2 years, the Labor Department reported Tuesday.

The department’s monthly consumer price index showed supermarket prices up 1.4% during the month, their biggest rise since January, 1984. More than three-fourths of the increase came from price hikes for poultry, eggs and fresh fruits and vegetables, mostly stemming from the drought. Prices of fresh fruits and vegetables alone leaped by 4.7%.

Also as a result of the drought, pork prices plummeted 2.2%, as producers sold hogs early at reduced prices rather than pay the cost of higher feed prices later. Overall food prices, including restaurant tabs and alcoholic beverages, leaped 0.9% over the month.

Using It as Excuse

But analysts were suspicious that some producers, food processors and retailers may be using the drought as an excuse to raise prices across a broad range of products, even on such items as cereals and bakery products, on which the crop damage has had little or no impact.

“I’d say about half of what’s going on in the supermarkets is drought-related; the other half is open to question,” said Donald Ratajczak, an inflation specialist at Georgia State University. Similar patterns developed during crop shortages in the 1970s.

Nevertheless, the nation’s overall inflation rate accelerated only a modest 0.4% in July--an annual rate of 5.2%--held in check partly by declines in prices for apparel, which has been selling at discounts recently in the face of consumer resistance to miniskirts and other new fashions.

Charles B. Reeder, an economic consultant based in Wilmington, Del., said that overall the July figures confirmed the trend that began earlier this year showing a gradual but decided worsening of inflation. “It’s escalating, but it isn’t excessive yet,” he said.

Although consumer prices had been rising more sharply earlier this year, they climbed only 0.3% a month in May and June. For the three months that ended in July, inflation at the retail level rose at an annual rate of 4.5%, up from a 3.7% pace for a similar period ending in June.

Along with the figures on rising prices, the department reported that the average hourly wages of rank-and-file production workers rose another 0.4% in July to 3.9% above that of a year ago and that workers spent 0.6% more time on the job, thanks to increased overtime.

Gains Wiped Out

However, the gains in earnings essentially were wiped out by inflation, and the purchasing power of the typical consumer fell 0.4% in July, continuing the decline that began last year. During the last 12 months, purchasing power has dropped by just under 4%.

Meanwhile, the department said that consumer prices in the Los Angeles-Long Beach-Anaheim area rose 0.1% over the month, the same size rise reported in June. Consumer prices in the Southern California area now stand about 4.8% above their level of a year ago. But the statistics are not adjusted to compensate for seasonal patterns.

Separately, the Commerce Department reported that new orders for durable goods across the nation as a whole plunged 7% during July in their sharpest fall in more than four years, offsetting an 8.7% increase recorded in June.

Aircraft Orders

In both months, however, the largest part of the shift came mainly in orders for new aircraft, whose price tags are so large that even small changes can send the totals swinging wildly. With aircraft excluded, the index declined 2.4%, after a 4.1% rise in June.

Analysts said that new orders for big-ticket items in the rest of the economy generally were strong, reflecting near-overheating in the economy. Many analysts fear that the economy soon will have to slow or inflation will begin to pick up even more speed.

The sharp rise in supermarket prices was a surprise to some analysts. Economists generally have been predicting that it would take several more months--probably well into 1989--for price hikes stemming from the drought to show up at the retail level.

Similar Shortages

However, Carol Brookins, president of World Perspectives Inc., a Washington-based agricultural and trade consulting firm, said that the quick pass-through paralleled that of the 1970s, when the nation experienced similar shortages in grains and other basic crops.

“People tend to put through price increases immediately, based on replacement costs,” Brookins said.

Despite the decline in apparel prices, the overall inflation picture continued to worsen slightly during July.

Georgia State’s Ratajczak estimated that if apparel prices had remained stable, the key index of prices for all items except food and energy--considered the most reliable measure of the underlying inflation rate--would have climbed by 0.5% for the month instead of 0.3% as officially recorded.

Still, he said, “it is slight. We aren’t about to be overwhelmed by inflation.”

Energy prices rose 0.3% during the month, after several months of decline, mainly because of a sharp 0.7% increase in gasoline prices. And medical prices soared 0.8% in July, double the previous month’s pace.

The July increase brought the overall index of consumer prices to 118.5% of its 1982-84 average, meaning that it cost $11.85 in July to buy the same goods and services at retail that cost only $10 four to six years ago.