Rise in Prices Stirs More Inflation Fears

Consumer prices and retail sales jumped in April, the government said Thursday in a pair of reports that suggest the economy is gaining strength even as they rekindled fears of inflation.

Those fears jolted the financial markets. The Dow Jones industrial average had its biggest loss in six weeks, closing down 34.32 points at 3,447.99 from its record close Wednesday. Bond prices tumbled as nervous investors shunned fixed-income securities, while the price of gold rose.

The markets were roiled by a Labor Department report that the prices consumers pay for goods and services jumped 0.4% in April, their largest increase in three months. The Commerce Department, meanwhile, said retail sales rebounded 1.2% from a steep, weather-related decline in March.

The reports came a day after the government announced that prices at the wholesale level in April shot up at their fastest pace in 2 1/2 years.

“A lot of people have been talking about all of these (inflationary) blips on the screen for months; we are at the point now where there is reason to be concerned,” said Daryl Delano, senior economist for Cahners Economics in Newton, Mass. “We’ve had quite a run-up in prices.”

Asked Thursday about the government’s latest economic report, President Clinton said he did not see evidence of long-term continuing inflationary pressures. “At the present time, there is no cause for long-term concern,” he told reporters after a meeting with small business leaders. “Unless there is some underlying change in the economy, it is difficult to imagine how it could have a significant upsurge in inflation.”

In Southern California, where the economy remains more sluggish than elsewhere, the cost of goods and services rose just 0.1% in April, after falling 0.1% in March. Increases in food and housing prices were countered by declines in apparel and transportation costs, a Labor Department spokesman said. The affected counties are Los Angeles, Orange, Ventura, San Bernardino and Riverside.

With continued high unemployment, slumping real estate markets and moderating medical costs from coast to coast, many economists thought this year would be nearly a carbon copy of 1990-1991, when the recession kept overall price increases down to a paltry 3%.

The outlook for low U.S. inflation was buttressed by similar trends overseas: Germany’s central bank has been reducing key interest rates and in Japan, bargain-hunting buyers hold sway over slumping real estate and retail markets.

What’s more, added John Tuccillo, chief economist for the National Assn. of Realtors, there was little evidence that pessimistic consumers have changed. “If people can’t feel or see an economic recovery,” said Tuccillo, “then, it doesn’t exist.”

But economists now say evidence is growing stronger that the economy is strengthening and that inflation will rise half a percentage point or so to between 3% and 3.5%--slightly higher than earlier predictions.

“A lot of the discounting that took place during the recession has stopped,” said Joseph Carson, chief economist at Dean Witter Reynolds Inc., the New York investment house. “I definitely think inflation is headed up for the year.”

How can producers raise prices in the face of less than robust personal income and job growth? Blame Mother Nature and a shift in corporate pricing strategy.

The effort to rebuild South Florida from more than $16 billion in hurricane damage last year has helped double lumber prices since October. Last year’s hurricane in Hawaii and riots in Los Angeles have also boosted demand for lumber and enabled price increases to stick.

Similarly, a late winter snowstorm and cold snap in the Southeast delayed or destroyed early spring crops, resulting in higher food prices, which had been hovering well below the overall rate of inflation.

Meanwhile, corporations--after spending the last two years down-sizing and cutting costs to boost profits--are starting to test increasing their profitability by passing along price increases, said Delano.

The trends present Clinton with a troubling new challenge in his efforts to boost the national economy.

“It complicates his plan in a few ways,” said Carson. “The price increases tell us something about the economy, and that is that the Republicans may have been right when they said we didn’t need the stimulus the President is proposing.”