Consumer Price Rise of 0.6% in Month Tops Most Predictions
Consumer prices advanced 0.6% in May, a clear warning that inflation remains a stubborn threat to the economy, the Labor department reported Friday.
The increase, larger than expected, was exaggerated slightly by continuing steep inflation for energy and some food products. But even without those volatile items, the core rate of inflation marched ahead 0.5% in May.
That amounts to an annual rate of more than 6%, well ahead of what the Federal Reserve Board has said would be tolerable. For the first five months of the year, the consumer price index has advanced at a 6.7% annual rate.
Before seasonal adjustment, consumer prices in the Los Angeles-Long Beach-Anaheim area increased 0.9% in May, compared to 0.6% nationwide. Inflation for the 12 months ending in May was 5.2% in the metropolitan area, compared with 5.4% nationwide.
Economists, hoping that inflation would begin to level off, were mildly discouraged by the new report. But noting that the spot-market price for crude oil has begun declining, they held out the promise that the expected inflation slowdown may yet occur later in the year.
“Inflation is stubborn, and some people in the markets were getting ahead of themselves with wishful thinking in believing it will go away without some pain,” said Bruce Steinberg of Merrill Lynch, the New York brokerage house. “The economy is weaker, but inflation is still too high.”
“If there’s any good news on the horizon, it’s that this is likely to be the worst report we’ll get for a while,” added Stacy Kottman of the economic forecasting project at Georgia State University, which specializes in charting price movements.
Kottman noted that in the past three months, drought-induced food price increases and producer-manipulated energy hikes had their maximum effect on the consumer price index. Gasoline prices jumped 3.9% in May, pushing up energy as a whole 1.6%. A 3.2% spurt in fruit and vegetable prices put food prices up 0.6% for the month.
OPEC Raising Production Levels
But the Organization of Petroleum Exporting Countries is now raising production levels, and rain is falling across the once-parched farm belt. The result in coming months, Kottman said, is likely to be a monthly inflation rate of between 0.3% and 0.5%, rather than the 0.5%-to-0.7% range seen so far this year.
That would add up to about a 5% increase in the CPI this year, compared with 4.4% in 1988.
The Labor Department report contained other fragments of evidence that the inflation rate may be steadying, rather than accelerating. Although the core inflation rate of 0.5% exceeded the 0.2% that was registered in April, it was consistent with the monthly rates that have been recorded since the beginning of 1988, said Cynthia Latta of Data Resources Inc., an economic forecasting firm in Lexington, Mass.
Latta noted that the core inflation rate for the previous 12 months measured 4.2% in January, 1988, and advanced to 4.7% in December, 1988. “And right now,” Latta said, “it hasn’t gone any further.” For the 12 months ending in May, the increase in the core inflation rate was 4.6%.
Richard W. Rahn, chief economist at the U.S. Chamber of Commerce, made a similar point. “The underlying rate--the CPI less food and energy prices--fell to a 4.5% annual rate of increase in the last three months, down from 5.2% for the previous three months,” he said in a statement.
Contributing to the 0.5% increase in May’s core inflation rate were price increases across the board: medical care up 0.6%, homeowners’ costs up 0.7%, all services up 0.4%, clothing up 0.8%. New car prices were down 0.1%, but that was offset by a 0.7% increase in new car financing.
“Over the past 12 months, we have seen big increases in basic necessities of living,” Merrill Lynch’s Steinberg said. “Food at home, up 8.1%. Transportation, up 7.3%. Medical care, up 7.3%. Yet wages as a whole are up less than 4%. That’s a remarkable set of affairs, and you wonder how long the economy can sustain that. Sooner or later, the need for wages to catch up will put a floor under the core inflation rate.”
The consumer price index stood at 123.80 in May, meaning that a hypothetical selection of goods and services costing $100 in 1982-1984 would have cost $123.80 last month, 70 cents more than in April.
