Price Rise of 1.1% Highest in Eight Years

Consumer prices shot up 1.1% in January, the largest monthly increase in nearly eight years, the Labor Department reported Wednesday, prompting warnings from economists that Americans may be facing a new inflationary spiral.

Fueling the January price gain was December’s record cold snap, which caused huge jumps in energy and food costs. But even without energy and food, the core inflation rate for January was a troublesome 0.6%.

If maintained for a full year, that would translate to an annual inflation rate of nearly 7.5%, contrasted with last year’s 4.5%.

Economists said the Federal Reserve Board, which nudged interest rates down as the economy showed signs of cooling in 1989, is unlikely to allow rates to fall further as long as inflation appears to be gaining momentum.

“Most of the energy and food (price gains) will probably unwind in the next few months, but it will be hard to get the core rate below where it is,” said Bruce Steinberg, an economist with Merrill Lynch in New York.

“Inflation is certainly not declining, because labor costs were rising at about 5% last year--which puts a floor under what inflation reduction can do,” Steinberg said. “There’s not much comfort here.”

With energy and food costs included, January’s gain was the biggest monthly jump in the Consumer Price Index since the 1.1% increase posted in June, 1982, when the economy was still recovering from the inflationary binge of the 1970s.

The White House, which tends to interpret economic statistics as favorably as possible, acknowledged that January’s retail figures were too high for comfort.

“This is disappointing news,” White House Press Secretary Marlin Fitzwater said. “We are hopeful that this is a bulge that will be temporary in nature, but inflation requires eternal vigilance, and we remain on a policy of wanting steady growth with low inflation.”

On Tuesday, Federal Reserve Board Chairman Alan Greenspan told Congress that lingering inflationary pressures remain a stubborn problem for the U.S. economy. He suggested that the Fed would not allow interest rates to decline from current levels.

The price figures, along with the prospect that the Federal Reserve Board will keep a tight grip on the nation’s credit supply, offered little in the way of encouragement to consumers or investors.

Interest rate jitters have contributed to recent declines in the stock and bond markets, with the Dow Jones industrial average falling nearly 39 points Tuesday and another 13 points Wednesday.

In his testimony, Greenspan said economic indicators suggest that the economy is increasing in strength. “While we cannot be certain that we are as yet out of the recessionary woods, such evidence warrants at least guarded optimism,” he said.

Greenspan said the Fed had lowered its overall inflation estimate for 1990 to 4% to 4.5%, down from a June forecast of 4.5% to 5%. The Bush Administration, meanwhile, is forecasting a 4.1% inflation rate.

But January’s retail price report could raise doubts about both projections and the Fed’s ability to keep inflation in check.

“This report is disturbingly high, because if you take out special factors it still leaves inflation at a 7.5% annual rate--which is much higher than the Fed target,” said Allen Sinai, chief economist at the Boston Co. in New York.

“The key here is services inflation,” Sinai said. “That sector is strong, in short supply of workers, and wage costs are going up. Commodity prices can gyrate like a yo-yo, but services inflation is rock-hard.”

The nation’s growing services sector, which accounts for nearly 55% of the CPI, posted a 0.6% price gain.

But it was record cold weather that was responsible for much of January’s price gain. Home heating oil soared a record 26.3%, pacing a 5.1% increase for overall energy prices. Fruit and vegetable prices jumped a record 10.2%, pushing the overall food index up 1.8% for the month.

Although the Labor Department noted that food and energy accounted for 60% of the overall January price increases, economists warned that the report contained ominous signs of pervasive inflation in virtually every category of the CPI.

Auto prices, for example, rose 0.6% during the month after sizable 0.8% and 1.1% increases in December and November, when new-year models came out. Medical services, which tend to outrun other categories, were up 0.6% in January.

“This is not a good report,” said Stacy Kottman of the economic forecasting unit at Georgia State University in Atlanta. “The most optimistic we can be is that, by the second quarter, we should see relief in food and energy. But these are real price moves which drain disposable income from people’s pockets. It has a dampening economic impact.”

In Greater Los Angeles, consumer prices rose 1.1% for the month before seasonal adjustment, compared to a 1% unadjusted increase nationwide.

Before adjusting for seasonal changes, the consumer price index stood at 127.4 in January. That means a hypothetical cross section of goods and services that cost $100 in the 1982-84 base period would have cost $127.40 last month, up from $126.10 in December and $121.10 a year earlier.