Inflation Hit 5-Year Low in ’91 : * Economy: The 3.1% figure could give the Federal Reserve room to maneuver if it again tries to speed up the recovery.

Inflation fell to a five-year low of 3.1% last year as the protracted recession dampened demand for consumer goods and petroleum prices plunged in the wake of the Persian Gulf War, the Labor Department reported Thursday.

The mild rise in the consumer price index--half 1990’s 6.1% gain--provided further evidence that recent interest rate reductions by the Federal Reserve Board are unlikely to rekindle inflation soon.

The Labor Department also reported that claims for unemployment benefits were at 403,000 in the week ending Jan. 4, down 49,000 from a revised 452,000 the week before. The slight decline was probably influenced by the holidays, economists said.

In a third report, the department said Americans’ average weekly earnings, after adjusting for inflation, increased 0.7% in December after a weak 0.1% rise in November. But over the year, real weekly earnings were up just 0.3%.

The plunge in consumer prices was led by petroleum prices, which rocketed upward in 1990 on fears that oil supplies would be severely restricted after war broke out in the Persian Gulf. However, Saudi Arabia increased production and kept prices at levels lower than expected. Nearly two-thirds of the improvement over 1990’s inflation rate was because of the drop in energy prices.

But virtually every category the Labor Department tracks contributed to the overall decline. Food prices went up 2.5%, the smallest increase since a 0.5% rise in 1976. Housing costs were up only 3.4%, down from 4.5% the year before. And medical costs, which rose 9.6% in 1990, went up 7.9% in 1991.

In Southern California, prices rose 2.5% for the year and actually dropped 0.3% in December from their November levels.

Even excluding the volatile food and energy sectors, the inflation rate declined nationally. The core rate was 4.4% in 1991, down from 5.2% in 1990.

White House press secretary Marlin Fitzwater said the Administration is “especially encouraged by the sharp deceleration in price increases for basic items in the average consumer’s basket of goods and services. . . . Obviously the unfortunate side of it is a good deal of that is because of the economic slowdown. But the low inflation clearly gives us some running room to implement plans that will stimulate the economy.”

As the recession took root the last 18 months, pressure built on the Federal Reserve to lower interest rates to revive investment and boost the economy. After several incremental reductions, the Fed on Dec. 20 lowered its benchmark discount rate--the rate it charges banks for loans--a surprising full point to 3.5%.

The encouraging news on prices should give Fed Chairman Alan Greenspan maneuvering room to lower interest rates again without reigniting inflation. Greenspan last week indicated that the Fed would wait to see if the economy responds to the rate cuts before making further reductions.

More important, the news on prices will heighten investor confidence “that the Fed won’t be changing its (low-interest) policies any time soon, and that long-term rates will start to come down as well,” said William Spriggs, an economist at the Economic Policy Institute in Washington.

The taming of inflation also gives some economists hope that a foundation exists for recovery to begin.

“The technical basis is there. It’s now a matter of confidence,” said Barry Rogstad, president of the American Business Conference. “Lower prices are a very positive sign. Now the banking structure has to translate the lower interest rates into real capital availability.”

Some observers believe that Thursday’s report on prices may signal an extended period of low inflation.

“The significance of the low rate of increase in the CPI (consumer price index) is that, after more than three years of slow growth, the economy has moved to a longer-term low-inflation environment,” said Jerry Jasinowski, president of the National Assn. of Manufacturers. “With the recovery in 1992 also expected to be unusually weak by historical standards, it is likely that the inflation rate will continue to decline.”