Consumer Prices Moderate in May as Food Costs Drop : Economy: The slight 0.1% increase was the best showing since January, and it bolsters analysts’ feelings about the recovery.

Consumer prices inched up just 0.1% in May as falling food costs and the first drop in drug prices in nearly two decades helped offset higher gasoline prices, the government said Friday.

It was the best showing for the Labor Department’s consumer price index since January, and it helped to ease fears raised Thursday when the government reported a worse than expected 0.4% jump in wholesale prices for May.

At the consumer level, there were outright price declines in a number of areas, including big ones for vegetables and airline tickets, and the first monthly decrease in prescription drug prices since March, 1973.

While the drug price decline was a tiny 0.1%, analysts said it showed that even in health care, the sector that has shown the biggest price increases over the past several years, there has been some price moderation this year.

Analysts said the consumer price report was a better gauge of how inflation was behaving in the current environment of an extremely weak economy, and that the producer price index had been skewed by a statistical aberration last month.

“What we have is a moderate, uneven recovery and against that background inflationary pressures are remaining constrained,” said David Jones, an economist at Aubrey G. Lanston & Co.

Financial investors were cheered by the inflation report, with the bond market staging a rally as worries about inflation were decreased.

“The important message that comes out of the CPI report is that the fears of inflation have been exaggerated,” said Bruce Steinberg, an economist at Merrill Lynch. “There is not going to be much inflation pressure coming out of this economy for the next 18 months.”

Some analysts said the CPI report cleared the way for the Federal Reserve to cut interest rates further, although they said such a move probably would not occur unless economic statistics over the next month persuaded the Fed that the recovery was collapsing.

“There is an outside chance there will be one more Fed easing, but for right now the Fed is perfectly happy to take a wait-and-see attitude,” Jones said.

For the first five months of this year, consumer prices have been rising at an annual rate of 3%. That was in line with the 3.1% increase turned in for 1991, the second-best yearly performance in the past quarter-century.

In other economic news Friday, the Commerce Department said that business inventories edged up 0.1% in April, the third consecutive monthly gain. Economists forecast even bigger gains in months to come as an improving economy prompts businesses to restock shelves and back lots in anticipation of rising sales.

Fixed-rate mortgages dropped to a nationwide average of 8.54% this week, according to a survey by the Federal Home Loan Mortgage Corp. It was the second-lowest level for 30-year mortgages since January, and economists said the good inflation news Friday should help to push rates even lower in coming weeks as investors become convinced that inflation remains under control.

The tiny 0.1% May increase in consumer prices came despite the fact that energy costs rose 0.6%, led by a 1.2% jump in gasoline prices.

Economists said energy prices will probably rise for a few months, given the decision by Saudi Arabia to seek higher prices, but that continuing weak global demand would prevent oil producers from gaining all they seek in price hikes.

Food prices fell 0.3% last month, largely reflecting a 14.1% drop in vegetable prices. Tomato prices plunged 47%, the biggest drop in two years.

Prices for fresh fruit turned up 0.8% in May as a decline in banana prices was offset by increases in other fruit prices.

Excluding the volatile food and energy categories, the underlying rate of inflation remained moderate as well last month, rising by 0.2% in May, the best showing this year.

Airline fares dropped 3.2% last month, their biggest decline since April, 1991, while tobacco prices jumped 2.4%, their biggest gain since January, 1989.

Consumer Price Index

Percent change from prior month, seasonally adjusted

May, ‘92: +0.1%

April, ‘92: +0.2%

May, ‘91: +0.2%