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Inflation Fears Ease as Prices Rise Only 0.2%

Times Staff Writer

Consumer prices rose only 0.2% in June as a five-month surge in oil and food prices came to an abrupt end, the Labor Department reported Wednesday.

The June increase in the consumer price index was the smallest in 16 months and was widely welcomed by financial markets and by economists who earlier this year had feared that surging inflation had become endemic in the economy.

On Wall Street, stocks soared to their highest levels since the October, 1987, crash, with the Dow Jones industrial average rising 39.65 points to 2,584.41.

0.3% Price Rises Seen

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“Food and energy inflation is behind us and should be out of the picture the rest of the year,” said Donald Ratajczak, economic forecaster and inflation specialist at Georgia State University in Atlanta. “Without food and energy, we’ll probably be in the 0.3%-a-month (increase) range the rest of the year.”

Gasoline prices, which had jumped more than 20% during the first five months of 1989, fell 1% in June. Food prices, which had been accelerating at an annual rate of almost 7% as a result of the drought, rose only 0.2% last month.

More significant, the “core” rate of consumer price inflation, which excludes the volatile food and energy prices, rose 0.2%. That puts it on track toward an annual rate of 4.5% this year, lower than the 1988 mark of 4.7% and well within the yearly range of 3.8% to 4.8% that has prevailed since inflation was tamed in 1982-83.

In the Los Angeles-Long Beach-Anaheim metropolitan area, prices in June rose 0.3%. Higher shelter costs--up 1.4% over the previous month--were blamed for most of the increase. Without the effects of those costs, the local area index would have dropped 0.2% because of lower prices for apparel, gasoline, food and beverages and personal care items. Medical care costs rose 0.7% in June.

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“We think inflation has been tamed for this year and maybe for this business cycle,” said Lynn Reaser of First Interstate Bancorp in Los Angeles. “It now appears that the main reason for the higher inflation we had was the surge in oil and the strong rise in food prices. But non-food, non-energy is now showing about the same rate as 1988.”

Consequently, she said, the Federal Reserve can conclude safely that its campaign to restrict money and tighten interest rates, begun in March, 1988, has not only slowed the economy but, more important to those who fear an inflationary burst, “has begun to affect prices, too.”

Accordingly, Reaser said, the Fed should be able to respond quickly with lower rates and expanded money supply if the economy slumps too severely later this year.

“The underlying rate of inflation has been around 4% pretty much since we knocked it down there in ’83, except for wiggles up or down caused by food and energy,” Ratajczak said. “So it really looks as though the Fed has succeeded in making sure the oil prices and the drought effects on food did not get embedded in the system this time. Consumers are not buying when prices get too high.”

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An important factor in the price moderation in June, he pointed out, was an event that has occurred every summer in recent years: Buyers have revolted against spring clothing price increases, which translates into steep discounts in June or July.

In Wednesday’s report, Labor Department statisticians estimated that clothing prices in general fell 1.1% in June and that prices of women’s clothing tumbled 2.2%. Before seasonal adjustment, which is intended to smooth out the steeper zigzags in price movements, women’s clothing prices dropped 3.9% and prices for clothing generally fell 2.2%.

‘Disinflation Showing Up’

“This report is very encouraging in that disinflation is showing up,” said Allen Sinai, chief economist of the Boston Co., who only a few months ago was warning that a pattern of 1970s-style stagflation was setting in. At that time, Sinai expressed concern that, although the economy was cooling rapidly, higher inflation appeared to have embedded itself in the system.

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The June report “hints that the weaker economy may have a wider impact on inflation more quickly than has been the case historically. It seems prices are more sensitive these days to changes in the economy than may have been true in the past and that businesses have been able to contain wage inflation more quickly than before.”

He added: “On one month’s report, it’s too early to get too optimistic about inflation, but it’s not too early to ask whether we may not be on track to quicker moderation of inflation. If inflation could unwind to an annual rate of 4% off a weak economy or a shallow downturn, that would be a small price to pay.”

In effect, Sinai suggested, the hoped-for “soft landing” may still be possible. That is, the Fed may manage to slow the economy gently enough to tame inflation without sending the country into a recession.

“It should be very satisfying to (Fed Chairman Alan) Greenspan, who has been trying to balance growth to inflation in an era in which external things like oil prices have mucked it up,” Sinai said. “But now food and energy are out of the index. The only question mark will be if wage costs put too high a floor under price inflation.”

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Before seasonal adjustment, the consumer price index rose in June to 124.1. This means that a cross section of goods and services costing $100 during the 1982-84 base period cost $124.10 in June.


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