Consumer prices leaped forward 0.6% in January, the largest such increase in two years, the Labor Department said Wednesday in a report that rattled financial markets and raised the specter of higher interest rates as the Federal Reserve cracks down.
Federal Reserve Board Chairman Alan Greenspan, alerting Congress for the second time in as many days to the perils of accelerating inflation, labeled the unexpectedly high jump in prices "disturbing" and "worrisome." He warned that the nation's economy may be faced with a no-win choice between still higher inflation and a serious recession if the central bank does not succeed in damping the price pressures now.
On Wall Street, share prices tumbled from the opening bell and the Dow Jones industrial average ended the day down 42.50 points, apparently bringing the new year's rally to a halt. (Details in Business.)
Fed Likely to Act
Investors apparently saw the price figures as strong new provocation for the Fed to push interest rates sharply higher to curb the surge, crimping economic growth in the process.
"There is little doubt that inflation is rising," said Donald Straszheim, an analyst at the Merrill Lynch brokerage firm in New York. "The question now is not whether there will be worse inflation this year, but how bad the numbers become . . . . I think Greenspan knows the next step is a wage-price spiral and that's why he will keep tightening" credit.
The 0.6% January consumer price increase, after two consecutive months of modest 0.3% rises, was the largest advance in the consumer price index since January, 1987, when it jumped 0.7%. More ominous, perhaps, was the fact that wholesale prices for the period, reported two weeks ago, moved ahead a full percentage point, almost certainly foreshadowing still more retail inflation in the months ahead.
Partly because of that wholesale jump, economists had been prepared for an inflationary advance of about 0.5%. But a price surge of 0.5% outside the volatile categories of energy and food gave them particular pause.
"This was not good . . . " said David Wyss, of Data Resources Inc., the Lexington, Mass., economic forecasting firm. "The mix that made up the number is worse than we expected." Wyss' firm now sees inflation at an annual rate of more than 5% this winter, tapering off only slightly later in the year.
Straszheim predicted that annual inflation could hit 5.5% to 6%. The rate for 1988 and 1987 was 4.4%.
Greenspan, in his second day of congressional testimony on the Fed's monetary policy, said a recent rise in wage costs was probably the reason that prices at the consumer level were beginning to climb more rapidly.
"What is worrisome is the fact that there is a trend," Greenspan told a House Banking, Finance and Urban Affairs subcommittee. He stressed the central bank's determination to fight inflation by trying to slow economic growth with higher interest rates. "The purpose of our policy is to make certain that trend does not continue," he said.
Danger of Recession
Greenspan was blunt about the potential costs if the Fed's credit tightening fails to curb escalating inflation. "If inflation re-emerges, I think a recession will move up on us much more quickly than we can imagine," he warned. "And when it occurs, it will be a prolonged one."
There were few redeeming features in Wednesday's Labor Department report. One was that several of the large increases in categories other than food and energy could be explained away as once-a-year price increases that most likely will not recur until next January.
Among these, noted Stacy Kottman of the economic forecasting project at Georgia State University in Atlanta, could be the 0.8% increases in medical care and medical services. Both probably were magnified by annual increases in insurance premiums that click in during January.
Similarly, prices for new cars--up 0.7%--and auto financing charges--up 1.6%--reflected the fact that special industry rebates for car and truck purchases lapsed in January. The rebates were largely reinstated by mid-February, suggesting that car price inflation, at least, will moderate in the next price report a month from now.
"January is a time of year when you have price changes in quite a few services," Kottman said. "These won't continue at this rate as you go through the year, so we won't get this much inflation all year."
But the broad range of the price trend was seen as alarming, nonetheless.
The price of admission to theaters, movies, concerts and other performing arts increased 1.2% during the month, helping push the entertainment category up 0.8%. Food prices rose 0.7%, driven primarily by steep, drought-caused advances of more than a percentage point for beef, pork and poultry. The price of motor fuels jumped 1%.
Overall, consumer price inflation was moving at an annual rate of more than 7% last month.
Even without food and energy, the annual rate of inflation last month was about 6%. So Wednesday's forecasts of inflation later in the year moderating to a range between 5% and 6% seemed at best cold comfort.
Before seasonal adjustment, the consumer price index advanced 0.6 to 121.1 of its 1982-1984 base of 100, meaning that a hypothetical selection of goods costing $100 during the base period would have cost $121.10 in January, 60 cents more than in December.
In the Los Angeles-Anaheim-Long Beach metropolitan area, consumer prices rose 0.3% without seasonal adjustment, and, over the last 12 months, prices in the metropolitan area were up 4.8%, compared to a 4.7% increase nationwide.