THE FRAGILE ECONOMY : Inflation in Check, but So Are Sales

The sluggish economic recovery held inflation to a scant 0.3% during June, while retail sales advanced a modest 0.5%, the government reported Tuesday.

Economists said business activity is advancing, but predicted slow growth for the rest of the year. Because a revival of inflation seems highly unlikely, the Federal Reserve will have room to pursue even deeper cuts in interest rates if unemployment continues to rise, said Michael Penzer, senior economist at the Bank of America.

“The low inflation numbers give them (the Fed) room to ease,” he said.

The core rate of inflation--excluding food and energy prices, which often fluctuate sharply--was just 0.2% during June. High unemployment and large unused capacity in many industries are keeping consumer prices in check, economists said.

Inflation is running at unusually low levels and “it would be difficult to reduce it further,” said Lawrence A. Hunter, vice president and chief economist at the U.S. Chamber of Commerce.

June’s national inflation rate outpaced the increases of 0.1.% in May and 0.2% in April because of a sharp rise in gasoline prices and an increase in food costs. Grocery store prices, which had fallen in April and May, rose last month, the Labor Department said. Clothing prices fell in June, reflecting seasonal sales. Prices rose 0.1% during June in the five greater Los Angeles-area counties: Los Angeles, Orange, Ventura, Riverside and San Bernardino.

If the current monthly inflation rate continues, prices for the full year will climb 3.1%, matching the yearly increase in 1991.

The Labor Department’s survey covered prices on a selection of goods and services, ranging from gasoline to a doctor’s office visit to movie tickets, purchased by typical urban consumers.

Despite the slow pace of inflation, consumer buying power is being eroded. Because the average number of hours worked declined during June, reflecting reduced overtime, there was a 1% drop in the purchasing power of the average worker.

Americans are being “squeezed by rising prices on the one hand and poor job conditions on the other,” Hunter said.

After a strong first quarter, retail sales have risen only slightly in the last three months, evidence that consumers are highly cautious. The sales increases were 0.3% in April, 0.4% in May and 0.5% in June.

But last month’s figure was driven by an unusually robust performance in auto sales, which rose 7.5%. The rest of the retailing sector showed a gain of just 0.1%, according to the Commerce Department.

“We are hoping consumers will begin to feel more confident about themselves,” said David Lereah, chief economist at the Mortgage Bankers Assn. The improvement has to extend beyond automobiles, he said: “Until we see durable goods sales increases, we will still be worried about consumers.”

“Retail sales could have been worse,” said Gordon Richards, chief economist for the National Assn. of Manufacturers. The recovery “is slow but steady . . . crawling along,” he said.

At the American Business Conference, a trade association for fast-growing enterprises, President Barry Rogstad reported a disparity of views among his members. The recovery “is not as broad-based as we would like to see it,” he said. “Some members really see a significant turnaround” underway, while others are still waiting for a business improvement, he noted.

Consumer Price Index

Percent change from prior month, seasonally adjusted:

June, ‘92: +0.3% May, ‘92: +0.1% June, ‘91: +0.3% Source: Labor Department

Retail Sales

Seasonally adjusted, billions of dollars:

June, ‘92: $159.8 May, ‘92: $150.0 June, ‘91: $152.6 Source: Commerce Department