Fuel, Food Costs Push Consumer Prices Up 0.5% : Economy: The increase was higher than anticipated. But experts expect the big gains in energy and food to abate during the next few months.
Unexpected increases in food, gasoline and housing costs pushed consumer prices up 0.5% in June, nearly double consensus expectations and well above the moderate 0.2% monthly inflation of April and May, the Labor Department reported Wednesday.
Despite the unforeseen surge in the consumer price index, which brought inflation to an annual rate of 5.9% for the first half of 1990 and 4.7% for the past 12 months, economists said that the big gains in energy and food should abate in coming months.
Federal Reserve Chairman Alan Greenspan conceded that last month’s inflation was “higher than we would like to see.” Even so, he said, the economy “is not on the edge of either falling apart into a recession or about to take on highly inflationary characteristics.”
Responding to signs of economic slowing and a possible credit crunch, the Fed last week eased its grip on the nation’s money supply and indicated Wednesday that it is willing to allow interest rates to ease further to offset the impact of an agreement to reduce the federal deficit.
Last month’s unexpected price surge, which was considerably higher than the 0.3% gain anticipated by private economists, reversed recent declines in energy and food prices after weather-related surges earlier in the year.
Food prices increased 0.7% in June, the government reported, after two consecutive months of price declines. Economists said the price increase reflected efforts by retailers to catch up with earlier jumps in wholesale food costs.
Donald Ratajczak, an economist at Georgia State University in Atlanta, noted that wholesale food prices fell in June, suggesting that grocery store prices would moderate in future months.
Gas prices spurted 2.5% in June after falling 1.6% the previous month, despite steady wholesale declines in energy prices. As with food, the price gains at the pump are expected to decline later on.
“Dealers are taking advantage of a strong driving season when prices normally go up,” Ratajczak said. “But (wholesale) gasoline and other energy prices were down . . . in June, and retailers are getting very good margins right now. So that should moderate.”
Yet last month’s price surge reflects more than just food and energy. Excluding those volatile components, the consumer price index still rose 0.4% in June. The gain reflects persistent increases in the cost of most services, which account for 55% of the index.
Because productivity improvement has lagged in service industries, labor costs are higher and inflation has become virtually endemic, said economist Allen Sinai of First Boston Co.
Medical costs, for instance, were up 0.7% in June after increases of 0.8% in each of the previous four months. Medical costs have risen 9% during the past 12 months and have soared at a 9.4% annual rate during the past three months.
Sinai noted that inflation for goods and commodities other than food and energy was only 0.1% in June but that the increase for services was 0.7%
An unexpected source of pain on the service side was a 0.6% increase in the cost of housing, which includes taxes and maintenance expenses as well as actual house prices. The big jump had been unexpected in view of the continuing slump in the real estate market nationwide.
“Housing was the big surprise here,” said Ratajczak. “Obviously it wasn’t up this much because housing prices are going up because they aren’t. But the cost of running a home continues to rise.”
Separately, the Commerce Department said housing construction continued to slump last month, with new housing starts tumbling 2.3% in June to the lowest level since the 1982 recession.
But the department also reported that applications for new building permits, off 3.9% in May, rebounded at the same rate in June, providing a possible early hint that the real estate slump may gradually be bottoming out.
The consumer price index was pegged at 129.9 in June from a base of 100 in 1982-1984. That means that an assortment of goods and services that cost $100 in the base period cost $129.90 in June.
CONSUMER PRICE INDEX Percent change from prior month June, ‘90: +0.5% May, ‘90: +0.2% June, ‘89: +0.2% Source: Labor Department HOUSING STARTS Seasonally adjusted annual rate, millions of units June, ‘90: 1.18 May, ‘90: 1.21 June, ‘89: 1.41 Source: Commerce Department
