Consumer Costs Fall 0.1%; First Drop in 5 Years
The consumer price index fell in March for the first time in almost five years, the Labor Department reported Friday, providing a strong signal that the recession finally is causing inflation to abate.
The department’s monthly report showed that consumer prices fell 0.1% last month after a modest 0.2% rise in January. Excluding volatile food and energy prices, the “core” inflation rate rose only 0.1% in March after a 0.7% jump the month before.
The March figures brought the overall pace of retail inflation for the first three months of this year to an annual rate of 2.4%--a marked slowdown from the 6.1% rise recorded in 1990 and the lowest such rate in several years.
The easing appeared likely to provide more leeway for the Federal Reserve Board to nudge interest rates lower. A similar report published Thursday showed that wholesale prices also fell sharply in March.
Friday’s bullish report sparked a rally in the financial markets. The Dow Jones Industrial Average rose 15.34 points after publication of the price figures, closing at 2,920.79.
In a separate report, the Commerce Department said that business inventories edged down by 0.2% in February as sales recovered from a decline--a development that analysts hope will lead to increased orders and new production. Business sales rose 0.5% during the month.
The combination of figures provided another dose of good news for Bush Administration policy-makers. The White House has been urging the Fed to push interest rates down further to help spark an economic recovery.
“This tells us that the optimists on inflation were right after all,” said analyst Roger Brinner of DRI/McGraw Hill, an economic forecasting firm in Lexington, Mass. “For a while, it seemed that the recession was not cutting into inflation. But now . . . we see the recession taking a point or a point and a half off the ‘core’ (inflation) rate. We see it back at an annual rate of 4% or less by summer.”
Nevertheless, Brinner said, he sees “only one chance in three (that) the Fed will yield on this news and cut rates, and two chances in three they’ll be stingy and wait.”
But Bruce Steinberg, an economist with Merrill Lynch in New York, said he believes that the Fed will respond favorably to the inflation report and ease interest rates soon.
“We’re beginning to see the moderation in inflation that a recession should produce,” Steinberg said. “It’s beginning to turn around now, and we should see inflationary momentum declining through the end of the year.”
It was not clear when or if the central bank might act. Some Fed policy-makers oppose moving too quickly lest lower rates rekindle inflation pressures. Analysts said that the Fed actually drained reserves from the banking system Friday to keep interest rates from declining.
The March decline brought the overall consumer price index to 135% of its 1982-84 average, meaning that, last month, it took $135 to buy the same goods and services that cost $100 just seven to nine years ago. It was the first time the index has dropped since April, 1986.
The price index for the Los Angeles metropolitan area paralleled the national statistics in March, also falling by 0.1% during the month after declining 0.1% the previous month. However, the state figures are collected on a smaller base and are considered more volatile.
The bulk of the fall in the national consumer price index was attributed to another large drop in gasoline and other energy prices, which plunged by 2.6% over the month after declines of 4% in February and 2.4% in January.
With the March drop included, energy prices have now declined about 18% from the peak they reached in November, the height of the scare about the effect of the Persian Gulf conflict on oil supplies. Energy prices currently are only 4.4% above their levels of a year ago.
Apparel prices also fell sharply, posting a 1.2% decline, which reversed a 1.6% rise the previous month. And transportation costs fell 1%, just slightly below the declines of 1.1% and 1.2% they recorded in February and January.
Food prices rose moderately, edging up 0.2% after a 0.1% increase in February. And housing costs rose less quickly, climbing a scant 0.1%--only about one-fourth of the increase recorded the month before.
THE ECONOMY
Consumer prices fell in March for the first time in nearly five years. THE CHANGES: Energy prices: Down sharply Food: Up slightly Clothing: Down Transportation: Down Housing: Up slightly Medical: Up Entertainment:Up
WHAT DOES IT MEAN? Inflation: Continued moderation in consumer prices likely this year. Interest Rates: Federal Reserve may nudge rates lower, but the timing is uncertain.
Source: Consumer Price Index.
