Inflation Indicator Holds Line at Zero : Economy: But bond yields rise on another report signaling possible price increases ahead.

Consumer prices remained flat in January, the first month in which costs failed to rise in more than four years, the Labor Department reported Thursday.

Economists said the zero growth in the consumer price index, a broad measure of ordinary living costs, reduces the need for the Federal Reserve Board to hike short-term interest rates--as the Fed did earlier this month--to curb inflation.

However, economists noted that the zero increase is somewhat misleading because the government is using a new method of calculation that is supposed to smooth out seasonal fluctuations. Under the old method, the CPI would have risen 0.3% in January.

Even so, economists said, the report is encouraging because the underlying rate of inflation--excluding the volatile food and energy sectors--inched up a mere 0.1%.

Nonetheless, bond market yields--which initially fell Thursday following release of the CPI report--later rose to 6 1/2-month highs following release of a report signaling possible inflation ahead. The “Business Outlook Survey” by the Federal Reserve Bank of Philadelphia showed a large number of companies reporting higher prices in February.

Analysts said they were generally surprised by the reaction to the Philadelphia Fed report, given the positive consumer inflation news.

Flat consumer prices--if they help keep interest rates low--could be a balm to California, where economic recovery and job creation have lagged the rest of the nation, economists said.

“It’s more invisible than one of your buddies being unemployed,” said Joseph Wahed, chief economist at Wells Fargo Bank in San Francisco. But if the value of money isn’t eroding and interest rates aren’t climbing, he said, both consumers and businesses are in a better position to spur economic expansion.

Showing the continuing discrepancy between Southern California’s economy and the rest of the nation, consumer prices rose 0.2% in the five-county metropolitan Los Angeles area. Higher housing costs led the way.

Energy prices dropped during the month, both nationally and in the Los Angeles region, according to Labor Department figures. Nationally, energy prices were down 0.8% in January, reflecting a surplus of oil supplies on the world market, and gasoline prices fell 0.4% after a 1.2% December drop. Home heating oil, electricity and natural gas prices also declined.

In the counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura, costs of fuels and other utilities dropped 0.4% from December. Gasoline prices were down 2.4% in the region.

James Padinha, an economist at First Interstate Bancorp in Los Angeles, said that “there are some weird things going on” causing fuel costs to fall, and “we don’t expect energy prices to keep doing this over the next months.” Padinha expects the consumer price index in all of 1994 to increase about 3%, as it has in each of the last two years.

*

January’s unchanged national index was the lowest since a similar report in August, 1989. Analysts had expected an increase of 0.3% in the CPI, following the 0.2% growth in December.

“On the national scene, there’s no question that inflation for the time being is a non-event in America,” said Wahed of Wells Fargo.

Although the Fed has dropped broad hints that another credit tightening will occur soon, Wahed said: “Now inflation is the last thing we have to worry about. Why beat a dead horse? In the next few months, we can take a look at interest rates again.”

Nationally, food prices fell 0.1% in January, led by lower-priced fruits and vegetables, following a 0.5% December rise. Entertainment and medical costs were key areas of higher prices, both up 0.3% for the second straight month.