‘88 Inflation Holds at 4.4% --Same as ’87

Consumer prices edged up a sedate 0.3% in December, the same as in the previous month, the Labor department said Thursday. That continued a moderating trend during the final months of 1988 that held inflation during the year to 4.4%, the same as in 1987.

Because of the summer drought, retail food prices rose 5.2% during the year, less than had been feared but still the largest food price increase since 1980. Energy prices, up 8.2% in 1987, rose only 0.5% last year, but the core rate of inflation, which excludes the volatile measures of food and energy, rose 4.7%. The cost of medical services rose 6.9%, as usual well ahead of the base rate of inflation.

But economists took comfort because inflation seemed to moderate in the latter part of the year, running at an annual rate of 4.1% during the last quarter. Earlier in the year, and as recently as last fall, there were widespread fears that inflation would ratchet to an annual rate of 5%, then mount higher.

“Pretty encouraging news,” said Bruce Steinberg, an economist with Merrill Lynch in New York. The leveling off of inflationary acceleration in late 1988, he suggested, was because of one main factor and three minor ones. Key, he said, were continuing “microscopic” wage increases almost across the board. Median wages were up only 3.4% on the hourly earnings index during the year, a full percentage point slower than the consumer price index.

The other factors holding down the acceleration of inflation last year, Steinberg said, were: a decline in the cost of most energy commodities, primarily gasoline and home fuel oil; a lower-than-expected inflationary backlash from the dollar’s decline, caused in part by the ability of foreign suppliers to hold down prices and by a stabilizing in the value of the dollar during the year, and, finally, continued high-visibility vigilance by the Federal Reserve, which not only raised the discount rate to 6.5% but has ratcheted short-term interest rates above 9% and has held tight reins on money supply growth all year long.

“Prices are still under control,” added Irwin L. Kellner, chief economist at Manufacturers Hanover in New York. “The bottom line is that inflation has stayed in the same range for two years now despite all the gyrations of the market. I just don’t think it’s a serious problem now--certainly nothing to justify the hysteria we’ve seen in the markets.”