Prices Rise 0.2% in April, Calming Inflation Fears

Consumer price inflation slowed to a sedate 0.2% in April, the Labor Department reported Wednesday, further calming fears that last winter’s brush with accelerating inflation would seriously damage the economy.

But economists were not sure that the inflation scare is really over, pointing to continued high inflation in some parts of the service economy while prices for goods have leveled off dramatically.

Citing a steep 5.8% decline in housing starts last month as further evidence of a slowing economy, some analysts said the Federal Reserve should focus on the low inflation in goods and commodities as a sign of a manufacturing sector in need of help.

“There is a fundamental split in the economy,” said economist Irwin L. Kellner of Manufacturers Hanover in New York. “There is a demand for employees on the service side, and wages and prices go up in lock-step. But the goods side is affected by economic policies and interest rates, and employment there is falling.”

The retail price report for April was largely in line with market expectations and reinforced the relief that many economists expressed last week when the government reported that wholesale prices dropped 0.3% in April.

Cold weather had pushed food and energy prices up during the winter, but many of those increases have now been reversed. Food prices fell 0.2% in April, the first such decline since July, 1987, while energy prices dropped 0.4%.

April’s lower inflation rate, which followed increases of 1.1% in January and 0.5% each in February and March, brought inflation so far this year to an annual rate of 6.8%. While no bargain, that still is a big improvement over the 8.5% pace recorded in the first quarter.

The “core” rate of consumer inflation, which excludes the volatile food and energy components, also subsided to 0.2% in April after a worrisome 0.7% in March.

Economists said that the winter price scare has abated and that the consumer price index appears to be moving back toward a long-term trend line of about 4.5% a year. But there was disagreement over what that means for the economy as a whole.

Roger Brinner, an analyst for Data Resources Inc., in Lexington, Mass., questioned whether inflation really could be controlled in a service-dominated economy in which such basic items as medical care are pushing up costs and wages at an inexorable rate. Medical costs rose 0.8% in April and have increased 8.9% over the last year.

“The economy is still fundamentally overheated and, if we don’t see a slowdown in employment-cost inflation, there will be no end to upward pressure on prices,” Brinner said. “The increases in medical care promise nothing less than a crisis for many individuals and for most employers.”

Kellner said the steady increases in services inflation are distinct from a basic weakness that he believes is hurting the goods-producing sector of the economy.

“The fact is, service costs like medical care and education are not affected by the same economic factors that affect the costs and prices of goods,” Kellner said. “I hope the Fed recognizes this--that higher interest and tight money really don’t impact medical care costs. People pay what they have to for doctors and for schools.”

Before adjustment, the consumer price index stood at 128.9 in April, up from 128.7 in March, based on an index of 100 set in the 1982-84 period. By that measure, a cross-section of goods and services costing $100 during the base period cost $128.90 last month.

The Labor Department estimated that consumer prices in the Los Angeles-Anaheim-Long Beach metropolitan area dropped 0.2% before seasonal adjustment, compared to an increase of 0.2% nationally. Consumer prices in the Los Angeles basin were 5.5% higher than a year ago, compared to a 4.7% increase nationally.

CONSUMER PRICE INDEX

Percent change from prior month April,’90: +0.2% March,’90: +0.5% April,’89: +0.7% Source: Labor Department