Surging Prices Push Inflation to 8-Year High

Consumer prices surged an unexpected 0.5% in March, pushing the annual inflation rate to an eight-year high of 8.5% for the first three months of 1990, the Labor Department reported Tuesday.

Sharply higher clothing prices and a surprising jump in housing costs were the biggest contributors to March’s inflationary spurt, which dashed any hopes that the Federal Reserve Board would respond to recent Bush Administration overtures to lower interest rates.

“It couldn’t have been worse if you’d designed it that way,” said Donald Straszheim, chief economist at Merrill Lynch in New York. “This is not the kind of numbers the Fed likes to see. Any hopes they will push interest rates down in the short run are not realistic.”

March’s increase in consumer prices followed an identical 0.5% gain in February and a 1.1% jump in January. The combined quarterly increase was the largest since the spring of 1982 and far greater than the 4.6% rise for all of 1989.

Inflation in the Los Angeles-Long Beach-Anaheim metropolitan area was 0.7% in March before seasonal adjustment, compared to an unadjusted 0.5% nationwide.

The monthly price gains were a surprise to economists, who had been encouraged by a report last week that wholesale prices had dipped 0.2% in March. Many analysts had predicted that the weather-fueled inflation of early winter was only a transient annoyance.

“The (consumer price index) shows an entrenched, unacceptably high rate of inflation,” said Allen Sinai, chief economist of the Boston Co. in New York. “The inflation result (is) dangerous and potentially devastating for financial markets and the economy.”

Another government report issued Tuesday suggested that inflation will not be cooled by a slowing economy any time soon.

The Federal Reserve, introducing an updated index to measure industrial production, said factory output increased a strong 0.7% in March. The Fed revised February’s industrial output to a gain of 0.8% from the originally reported 0.6%.

The Bureau of Labor Statistics estimated that about two-thirds of last month’s consumer price increase, which most economists had expected to be only about 0.2%, was attributable to the big gains in clothing and housing costs.

Clothing prices, which spurted 1.6% in March after a 3.3% surge in February, normally rise in late winter or early spring as new-season fashions are introduced. They typically begin to decline during late spring and summer as buyers resist posted prices and retailers discount to move the goods.

The housing price increases were more of a shock. Overall housing costs, including utilities and maintenance, were up 0.5% in March, led by a 1% gain in the estimated average cost of owning a home.

The increases came despite a big 9.3% decline in housing construction starts, according to another government report issued Tuesday. Economists were unable to explain the jump in housing costs, which had been expected to rise only modestly if at all.

Medical costs, which in recent years have risen at twice the pace of general inflation, increased 0.8% in March for the second consecutive month.

Energy costs declined 0.7% after posting large weather-related increases earlier in the year. Food prices, however, were up 0.4% despite a downward slide in wholesale food prices last month.

Excluding food and energy, consumer prices were up 0.7% for an underlying “core” inflation rate of more than 8% on an annual basis.

Straszheim, the Merrill Lynch economist, agreed with other analysts that the recent increases in clothing prices would reverse course soon, restraining inflation into the 4.5% to 5% range that prevailed before the first quarter.

Even so, he was far from sanguine about future consumer prices.

“The bottom line on inflation is, don’t be optimistic,” Straszheim said. “It’s going to take a significant downturn in economic activity to get much improvement in the inflation rate--and if we get it, it won’t be pleasant.”

The unadjusted consumer price index, computed from a 1982-1984 base of 100, was pegged at 128.7 in March. That means a hypothetical cross-section of goods and services that cost $100 in the base period had risen to $128.70 last month, compared to $128 in February.