Prices Up Just 0.1% in April, but Fed Hike Still Expected

The Commerce Department said Friday that consumer prices rose 0.1% last month, a paltry increase that may ease pressure on the Federal Reserve Board to dramatically raise interest rates in its effort to keep a lid on inflation and prevent the economy from overheating.

Although the report was the latest indicator that inflation remains in check despite the nation’s current economic expansion, it is not expected to dissuade the Fed from raising rates again--perhaps as early as next week--in its effort to keep inflationary pressures from building.

But some analysts said Friday’s report, combined with other recent signs that inflation is under control, could encourage the central bank to raise rates only slightly instead of initiating a larger increase that could possibly slam the brakes on the recovery.

“Most people have been saying that the Fed is going to raise rates by a half-point soon, but the data that has been released over the last few days indicates that it doesn’t need to raise rates at all,” said Fred Flick, an economist for the National Assn. of Realtors in Washington.

In a separate report, the Commerce Department said business inventories dipped 0.2% in March from February levels.

Analysts said the modest decline was also good news for holding down prices because it indicates there is little danger of product shortages.

The Fed has hiked the federal funds rate by a quarter of a percentage point three times over the past three months, and most analysts expect it to raise rates again by the time the board’s policy-making Federal Open Market Committee meets Tuesday.

By raising short-term rates, the Fed discourages businesses and consumers from borrowing more money, which in turn tends to slow down the economy and dampen inflation.

But Friday’s report that the prices consumers pay for a variety of goods and services--from food and shelter to gas and medical care--rose just 0.1% in April from March was the latest indication that inflation is not yet eating away at Americans’ buying power.

“Inflation is just nowhere to be seen,” said Sung Won Sohn, chief economist at financial services company Norwest Corp. in Minneapolis.

The Commerce Department’s report said consumers paid more for their food and medical attention last month but less for their utilities and clothes. Housing expenses were unchanged.

On Thursday, the department reported that wholesale prices--which measure inflation at the manufacturers’ level, before goods reach consumers--fell 0.1% in April.

But while some analysts said the two reports show that the economy is slowing by itself and doesn’t need any help from the Fed, others said inflationary pressures are quietly building and that the central bank will need to boost rates by at least half a percentage point to keep inflation from skyrocketing this year.

“Oil prices have jumped over the past few weeks, steel and auto prices are rising, and inflation seems to be waiting for a place to jump in and take hold,” said Cynthia Latta, senior financial economist at DRI/McGraw Hill in Boston.

“I think the Fed should raise rates the full (half-point) next week, and that’s just what it’s going to do,” she said.

A stiff increase in the federal funds rate would also send a strong message to investors on Wall Street and around the world that America is serious about keeping inflation in check, which could calm the roiling U.S. stock and bond markets and restore some of the dollar’s strength.

“The Fed might figure that it’s better to make one big increase in short-term rates and then sit back to see how it plays out, rather than raising rates in tiny increments and hoping for the best,” said Paul Kasriel, an economist at Northern Trust Co. in Chicago.

In a separate report issued Friday, the University of Michigan said its preliminary consumer confidence index has fallen slightly, to 91.5 this month from 92.6 in April, as rising rates made consumers more pessimistic about the future of the economy.

Consumer Price Index

Percent change from prior month, seasonally adjusted:

April 1994: 0.1%

Source: Labor Department