Inflation Rate Is Only 0.2% for Second Month in a Row
Consumer prices rose 0.2% in May, matching the previous month’s modest inflation rate, the Labor Department said Friday in the second encouraging report on prices in as many days.
The slowdown in consumer price inflation from a 1.1% spurt in January and an annual rate of 8.5% during the first quarter of the year was consistent with Thursday’s report that wholesale price increases for finished goods had settled at an annual rate of 4% during the first five months of 1990. So far this year, consumer price inflation is running at 5.8%, but the expectation is that it should continue to drop to slightly below 5% by year’s end.
In the Los Angeles-Long Beach-Anaheim area, consumer prices before seasonal adjustment rose 0.3% in May.
Economists analyzing the consumer price index and the producer price index, which for the first time in recent memory were reported on successive days this week, noted that a softening economy and weakened consumer demand were a prime reason for the slower pace of inflation. In addition, both measures of inflation were distorted by high energy and food prices in January, which since have been corrected downward.
But economists also pointed out that nearly 55% of the inflation in the consumer price index derives from the service sector of the economy, where prices are less influenced by the market forces that push down the prices of products during periods of slack demand.
“Most of the moderation here is in those areas where we saw temporary spikes earlier in the year,” cautioned Bruce Steinberg of Merrill Lynch in New York. “The overall tone here is positive, but there’s no guarantee that the underlying rate is coming down. Service inflation has been running higher than goods inflation for the past seven years, and while we’ve got pretty decent productivity growth in manufacturing, there seems to be negative productivity growth in services. The prices keep going up.”
The aggregate price of goods measured by the consumer price index actually fell in May by 0.1% after seasonal adjustment, but the price of services was up 0.3%. Allen Sinai of Boston Co. noted, however, that the increase in the price of services price was a big improvement from earlier in the year. The inflation rate for housing and transportation services has leveled off dramatically after large increases earlier, he pointed out.
At the same time, a slower-than-usual late spring increase in the cost of gasoline (up 1.5% before seasonal adjustment) was converted into a 1.6% decline after adjustment, and energy prices recorded a 0.7% decline.
Clothing prices, up sharply last winter when new spring styles arrived at stores earlier than usual, ran into substantial buyer resistance and were discounted across the board. That brought a big 1% decline in women’s clothes, a 2.2% drop in children’s clothes and a modest 0.4% increase in men’s clothes.
“The bread-and-butter categories that affect consumers most--food, housing, apparel, transportation--all showed up well,” Sinai said.
CONSUMER PRICE INDEX May, ‘90: +0.2 Apr., ‘90: +0.2 May, ‘89: +0.4
Source: Labor Department
