In Spite of Inflation, Prices of Many Assets Are Falling : Economy: Rising energy costs fuel increases. But real estate, precious metals and other items are dropping.

All the attention to rising energy costs is overshadowing a peculiar new trait of the U.S. economy: It is displaying a split personality when it comes to inflation.

Even as oil prices have dominated the headlines, prices for some raw materials, real estate, precious metals and other assets have been falling in the slumping economy. For these and other reasons, today’s inflation flare-up could prove less painful than past episodes.

“The impact of the oil shock on inflation is temporary,” predicted Mickey D. Levy, chief economist at CRT Government Securities in New York.

You might not know it from recent statistics. In August and September, the consumer price index jumped to a 9.5% annual rate. Wholesale prices took their greatest short-term leap in a decade, according to the Labor Department. Consumer inflation, measured for the final three months of this year, may hit a 10% annual rate.

Moreover, energy costs are certain to boost inflation for various goods and services in the coming months.

“For the first time in 10 years, inflation is rising toward double digits,” said Allen Sinai, chief economist with The Boston Co.

Yet there is a paradox. When the volatile factors of energy and food are not considered, September consumer prices rose at a more modest 4% rate. The statistic underscores the important differences between today’s oil shock and past bouts of inflation, including public psychology, the sluggish economy and policies of the Federal Reserve Board.

While oil prices have been rising, prices for a wide range of assets have been sliding in the United States and other countries.

“The undertow that we have in the economy right now isn’t inflation--it’s deflation,” said John Rutledge, chairman of the Claremont Economic Institute.

What is more, these trends are not likely to change dramatically, as some customers scale back their purchases in a time of recession fears.

A recent episode in the paper industry helps show why economic conditions may not lend themselves to higher prices.

On Oct. 1, major producers of paper products announced a $30-per-ton increase in prices for linerboard, a material used to make corrugated boxes. But the customers--box makers and other manufacturers--have rejected the attempt, citing the weak economy and the large supply of linerboard that remains available.

The hike is “dead as a doornail,” said George B. Adler, a paper industry analyst with the Smith Barney investment firm in New York. “Customers for boxes are not willing to accept the price increase.”

In other cases, companies--fearful of losing sales in a listless economy--have passed on to customers only some of the increase in energy costs.

Chemical manufacturers, for instance, have faced a whopping 57% increase in the cost of ethylene glycol, used for antifreeze. But so far they have passed on just a 13% hike to their industrial customers; little if any of the increase has reached the retail level, said Allen J. Lenz, director of trade and economics for the Chemical Manufacturers Assn. in Washington.

Prices for petrochemicals and other oil-based products also have risen much less than the price of energy.

“We see a situation evolving in which it will be difficult for industries to pass on increases because of the weaker economy,” said Frantz R. Price, vice president of strategic industry analysis at the WEFA Group, consultants in Bala-Cynwyd, Pa.

Indeed, some widely used industrial materials have been falling in price for several months.

Prices for zinc, rubber, hides, certain metal scrap and other raw materials have been running lower than a year ago, in some cases sharply so. Tin prices, for instance, have recently been as much as 26% less than a year ago on the open market.

A price index of 13 industrial commodities, compiled by the Commodity Research Bureau in New York, stands 3.8% lower than it did last October. This pattern of weak commodity prices carries a clear message, some say: The sluggish global economy does not lend itself to red-hot inflation.

“It’s a pretty good indicator of what’s likely to happen to inflation and interest rates,” said Irwin L. Kellner, chief economist at Manufacturers Hanover Trust Co.

“You’ll get a couple of bad months of inflation,” he said, “but by the end of the winter--assuming a normal winter--I think we’ll be back down to a 3% to 3 1/2% inflation rate.”

Meanwhile, tried and true inflation hedges of the past, such as real estate and precious metals, have been stagnating or declining in value.

Commercial real estate values, for instance, have been hammered in much of the country. Reasons include a surplus of office space--vacancy rates now hover between 15% and 20% in much of Southern California--and the scarcity of financing for projects, arising from problems in the thrift and banking industries.

“The two of those things together are causing a downturn in real estate prices,” said Frederick K. Zimmermann, president of Boylston Capital Advisors, a money management firm in Boston.

Prices for gold, another popular refuge in times of inflation, also have been dropping. After soaring by $42 an ounce in the first weeks after Iraq invaded Kuwait, gold has fallen back to pre-invasion price levels of less than $380.

Gold investors are not convinced that inflation is going to surge, explained Bruce L. Kaplan, president of Kaplan & Co., a precious-metals consulting firm in Los Angeles. The lackluster economy also has taken the sparkle out of such other precious-metal investments as silver, used in the photographic industry, and platinum, used by auto makers.

“Investors are reading magazines like Fortune that say inflation may be topping out right now--even with the increase in oil prices,” Kaplan said.

Federal Reserve policy may be yet another reason that inflation does not take off in the coming months.

Earlier this week, the Fed moved to ease interest rates as a way to stimulate the economy. But the move was modest, a clear sign that inflation fears remain strong among policy-makers in Washington.

“They’ve learned from their mistakes of the past,” said Michael Penzer, a vice president and senior economist at the Bank of America in San Francisco.

Still, as the Fed’s caution demonstrates, nobody is writing off inflation as a threat. In particular, some worry about stagflation--a bout with uncomfortably high prices at a time of uncomfortably sluggish growth.

These days, the weak U.S. dollar creates inflationary pressure by pushing up import prices and by forcing the Fed to keep interest rates high enough to attract foreign investment.

Health care--notably hospital fees--higher education, local taxes and the cost of shelter all have risen substantially this year. Even before Iraq invaded Kuwait, the underlying annual rate of inflation was creeping up from the 4.5% range to greater than 5%.

“The question is how do you stop it?” asked David Wyss, an economist with Data Resources-McGraw Hill in Lexington, Mass., of inflation in health care and other services. “The standard formulas don’t work very well.”

There also is no standard formula to forecast how members of the public will behave in the coming months. Back in the 1970s, Americans got so accustomed to a never-ending spiral of rising wages and prices that the hikes were accepted routinely.

But after years of restraint in wage and price increases, public psychology may be different this time, with employers less willing to raise wages and consumers less accepting of higher prices.

For all the uncertainties, “I absolutely expect inflation to fall next year” from current levels, said Joel L. Naroff, senior economist at First Fidelity Bancorp in Philadelphia.