Consumer Prices Remain Steady During August : Best Showing in Over 3 Years; Decline in Energy Sector Helps Cap Inflation

The rise in consumer prices halted abruptly in August after slowing during most of the summer, marking the nation’s best performance on inflation in more than three years, the government reported Tuesday.

The respite--the first month since April, 1986, that the consumer price index remained unchanged--mainly reflected a 4.2% plunge in gasoline prices that helped offset increases in other prices. The decline in energy prices was the steepest in three years.

It was the third month in a row that declining energy prices have kept inflation low at the retail level. The consumer price index rose a relatively modest 0.2% in June and July, after increases of 0.7% and 0.6%, respectively, in April and May.

The August figures left the pace of inflation during the past 12 months at an annual rate of 4.7%.

Conflicting Interpretations

The Bush Administration touted the new figures as further evidence that its economic policies are working. The slowdown had been predicted by the President’s Council of Economic Advisers, which had insisted that sharp increases posted earlier this year were transitory.

But analysts outside the government were sharply divided Tuesday over whether the pause in August would prove fleeting. Some said that the recent declines in energy prices, along with slower food price increases, were masking a further speedup in the underlying inflation rate.

David D. Hale, economist for Kemper Financial Services Inc., in Chicago, forecast that the food and energy declines would come to an end soon and that August’s consumer price index report may be “the last good CPI for the year.”

Joel A. Popkin, a Washington-based inflation watcher, said the past three months’ good behavior on the price front is likely to prove nothing more than “a summer lull.” He predicted that the overall inflation rate “will go back up to 5%” by year-end.

Separately, the Commerce Department reported Tuesday that housing starts in the United States fell sharply in August to a new annual rate of 1.35 million units, down 5% from the previous month and the largest decline since a 12.7% plunge in February.

Analysts blamed the fall on continuing high interest rates. Construction starts had fallen steadily for four straight months until rebounding in June--the longest string of declines since early 1987. Apartment construction fell in August by 11.4%.

Even so, applications for new building permits, a harbinger of future trends in construction activity, rose 3.5% in August after falling in July. Analysts said construction patterns are likely to be erratic for the rest of the year.

Not Unexpected

In a calculation separate from the national inflation figures, the Labor Department reported that the consumer price index for the Los Angeles area fell 0.1% in August, after a 0.2% rise the previous month. But the indexes kept for individual cities are erratic and are not adjusted for seasonal patterns.

The August freeze in consumer prices nationwide had been widely expected. Jerry L. Jordan, economist for First Interstate Bancorp in Los Angeles, said the recent respite was “a mirror image” of the first half of 1989, when inflation was exacerbated by a series of special factors.

He and other economists cited these developments:

- Food prices, which rose sharply during the first half of the year after the drought in mid- and late 1988, slowed substantially in early summer and have risen only moderately since. They rose 0.2% in August, after a 0.3% increase in July.

- Energy prices, particularly for gasoline, climbed steeply earlier in the year in the face of fears of shortages in the world oil market but have come down steadily--and sharply--in the second half. In August, they plunged nearly 2%.

- High inventories in the auto industry have led to significant discounting of car prices, particularly with the end of the model year this month. New car prices have edge downward for most of the summer. In August, they fell 0.3%.

- The steady rise in the value of the dollar has made imported goods less expensive for Americans, slowing that component of the consumer price index and keeping pressure on the rest of the economy as well.

Most economists predict that inflation will receive another jolt this autumn, as the “summer lull” comes to an end. New 1990 model cars to be introduced in October are expected to be decidedly more expensive, and the dollar could decline anew.

“We are going to see a spike up beginning in October,” said Edward Guay, economist for Cigna Corp. in Hartford, Conn.

But analysts differ sharply over what the inflation rate will be once that “spike” has ended. Guay, for one, said he believes that inflation is apt to slow again, if only because the Federal Reserve Board has been holding the economy in check.

He noted that wage increases have remained relatively modest, despite the earlier speedups in food and energy prices. And he predicted that the gradual slowing of the economy will help push interest rates down further early next year.

But Popkin predicted that inflation has already built up too much momentum to be cut without a serious recession. The fact that analysts are predicting a “soft landing,” in which the economy will escape a recession, means that “the best we can do is flatten inflation,” he said.

Other important components of the consumer price index turned in a mixed performance during August. Medical costs jumped 0.7%, continuing the same frenetic pace at which they have risen for the bulk of the year.

The cost of apparel and household upkeep declined 1.5% in August, after steady decreases over the past three months. The Labor Department said end-of-season price reductions, particularly for women’s and children’s clothes, were larger than in previous years.

And entertainment costs rose 0.3% for the month, halving the 0.6% pace at which they rose in June and July and reflecting a general slowdown in demand.

The August report left the overall consumer price index at 124.6% of its 1982-84 average--meaning that it took $124.60 last month to buy the same goods and services that cost $100 in the early part of the decade.