Inflation Surges in January Despite Drop in Oil Prices

The nation’s underlying inflation rate worsened significantly during January despite a sharp drop in oil prices, the government reported Wednesday, prompting new worries that the price surge may be more virulent than analysts had thought.

The Labor Department’s monthly consumer price index rose 0.4% over the month, after increases of 0.3% in November and December. But the rise still was well below the 0.8% and 0.6% increases that prevailed during August and September at the start of the Persian Gulf crisis.

Worrisome to some economists, however, is that the underlying rate of inflation, excluding volatile food and energy prices, rose a steep 0.8%--considerably higher than anticipated--indicating that inflation is still menacing the recession-plagued economy.

Meanwhile, the Commerce Department reported that housing starts plunged 12.8% during January to their lowest level since 1982, after a 13.7% drop in December. It was the 11th decline in 12 months. Building permits also fell 4.7% in January, suggesting that there are further declines to come.

Despite the gloomy figures, Federal Reserve Board Chairman Alan Greenspan told Congress Wednesday that the inflation rate in 1991 may be between 3.25% and 4%--the lowest in several years. He also forecast a moderate upturn in the economy in coming quarters.

Donald Straszheim, chief economist at Merrill Lynch in New York, said he thinks the current credit crunch is still so severe that Wednesday’s report will not deter the Fed from further easing money and credit policies.

“This is a bad reading but it’s an outlier (not in line with other trends),” Straszheim said. “We ought to get better inflation later on, and this absolutely won’t panic the Fed--for now. Greenspan will look at it, be disappointed and go on his way.”

Private economists were more bearish than Greenspan about this year’s inflation outlook.

“Inflation is more of a nagging problem than people think,” said Giulio Martini, economist at Sanford Bernstein & Co. in New York. “Last year people thought slow growth would tame it. . . . Now we are in recession and inflation is still stubborn.”

The January figures brought the overall consumer price index nationally to 134.6% of its 1982-84 average, which means that it took $134.60 to buy the same goods and services at retail in January that cost $100 eight years ago.

The Labor Department reported separately that living costs in Southern California rose 0.6% over the month, after a 0.2% climb in December. And consumer prices in the San Francisco area leaped 1.2%, after a 0.3% increase in December. Local indexes often are more volatile than national figures.

By far the sharpest increase in January was for prices of food and beverages, which soared by 0.9%, mainly as a result of the freeze in California and some other states. Prices of fruits and vegetables bolted by 2.9%, reversing a decline of 0.6% in December.

Prices of oranges jumped 37.2% over the month, while lettuce prices climbed by 24.5% and prices of cereal and bakery products rose 1.3%. At the same time, however, dairy prices fell 1.2%, their third monthly drop in a row.

But prices of other major goods and services also soared. Apparel prices jumped 1% over the month, partly because retailers began their Christmas sales earlier than usual and did not discount their prices as much in January.

Housing costs rose 0.8%, partly because of start-of-the-year increases in hotel prices. Entertainment costs climbed 0.7%, and medical-care costs rose 0.6%. The only drop was in transportation costs, which fell 1.2%, mainly because of fuel prices.

The index also was pushed up by the impact of increases in federal excise taxes on tobacco and jewelry, which Congress approved last autumn to take effect Jan. 1. Tobacco prices rose 1.2% over the month, while prices of watches and jewelry rose 4.3%.

But prices of motor fuel and gasoline plunged by 6.5% and 6.9% respectively, continuing their declines from the peak that followed the onset of the Persian Gulf crisis in August. Energy generally was 2.4% cheaper than in December.

“We have retraced probably 90% of the oil and gasoline run-up with the Persian Gulf,” said Donald Straszheim, chief economist at Merrill Lynch in New York. “Most of that good news is already history.” Donald Ratajczak, an inflation specialist for Georgia State University’s economic forecasting service in Atlanta, said the increases are explainable individually, but still worrisome in aggregate.

“As I look at it, I can find answers for virtually every price move here,” he said, “but it’s still unquestionably troubling. I’m assuming that there’s no way price increases like this can persist. If it did, then we’d be in real trouble.”

Wednesday’s figures on consumer prices brought the overall rate of inflation over the three-month period that ended in January to an annual rate of 4.3%. Over the past 12 months, consumer prices have risen by 5.7%.

(Southland Edition) HOUSING STARTS Seasonally adjusted annual rate, millions of units Jan.,: ‘91: 0.85 Dec.,: ‘90: 0.98 Jan.,: ‘90: 154 Source: Commerce Department (Southland Edition) Consumer Price Index Percent change from prior month, seasonally adjusted Jan.,: ‘91: +0.4% Dec.,: ‘90: +0.3% Jan.,: ‘90: +1.1% Source: Labor Department