Inflation, Housing Starts Cool in August : Prices Frozen at July Level; 5% Drop in Construction

U.S. consumer prices and housing starts cooled in August, the government reported today, with retail inflation frozen at July’s level and housing construction at a six-month low.

The zero inflation figure was the first time that the Labor Department’s consumer price index has not registered an increase since April, 1986, when it fell by 0.3%. The August performance was credited to a 4.2% plunge in gasoline prices, the steepest one-month drop in three years.

Falling energy prices have given consumers three consecutive months of good news on inflation. Prices were up a modest 0.2% in June and July.

Rises Early in Year

This was in sharp contrast to the situation earlier in 1989 when steep hikes in gasoline and food led to a surge in prices and pushed the inflation rate up to an annual level of 6.7% for the first five months of the year.

But with the price moderation in the three months since then, consumer prices are rising at a more modest annual rate of 4.8%, up only slightly from the 4.4% increase for all of 1988.

Construction starts of new homes fell by a sharp 5% in August, the largest drop in six months, the Commerce Department said. The figure surprised economists, who were expecting it to stay unchanged from July.

It was the first decline since May for the housing industry, which had been among the sectors hardest hit earlier this year as the Federal Reserve drove up interest rates to slow economic growth and control inflation.

Total housing starts during the first eight months of the year are down 4.7% from the same period of 1988.

While some economists say the country is in for moderation in inflation, other analysts are worried that underlying inflationary pressures are being masked by the plunge in energy costs.

These economists say energy prices, which surged early in the year only to fall back somewhat in the last three months, are likely to begin rising again this fall, reflecting higher crude oil costs.

Gasoline prices shot up 21.2% in the first five months of the year, then fell 1% in June, 2.2% in July and 4.2% in August. The August decline was the biggest drop since a 5.2% decrease in August, 1986.

Natural gas and electricity prices registered a 0.2% decline while heating oil costs fell by 0.9% last month.

Food prices rose a modest 0.2% in August following a 0.3% July gain. Those figures were in sharp contrast to the first nine months of the year, when the lingering effects of the 1988 drought sent food costs racing ahead at a 9.3% annual rate.

Clothing costs fell a sharp 1.5% in August, helping to push apparel prices down by 3.4% over the last three months. The price drop was credited to larger than normal end-of-season price cuts for women’s and girls’ clothing.

U.S. Treasury bond prices rose slightly after the reports were issued, reflecting reduced inflation concerns, but then pulled back to stand little changed from Monday’s close.