Modest Rise in Index Restrains Inflation Fears : Economy: The August figure for consumer prices gives a boost to stocks and bonds and eases pressure for Fed action.
Consumer prices rose at a lower-than-expected rate of 0.3% in August, the Labor Department reported Tuesday, helping to ease inflation concerns sparked by last week’s wholesale price report.
Investors reacted positively to the latest news and analysts said the government report took pressure off the Federal Reserve Board to raise interest rates for the sixth time this year.
The Dow Jones industrial average closed the day at 3,879.86, up 19.52 points, while bond prices were up as well, pushing the yield on the Treasury’s benchmark 30-year bond down to 7.68% from 7.71%.
“The number was better than had been generally anticipated,” said Hugh Johnson, chief economist at First Albany Corp. “What this simply says is that some of the increases we have seen at the wholesale level have not found their way to the consumer level.”
Last Friday, the government reported that wholesale prices jumped 0.6% in August, the highest such increase in nearly four years.
But Johnson noted that consumer prices did not reflect the wholesale price increases, largely because consumers won’t tolerate price increases.
“It’s not easy for retailers to pass along the increases to consumers,” Johnson said.
Consumer prices in Southern California rose just 0.2% in August as low food prices offset higher transportation costs, according to the Labor Department. While consumer prices in Los Angeles, San Bernardino, Riverside, Orange and Ventura counties have risen 1.1% since the beginning of the year, they rose only 0.1% last month.
Most financial experts predicted at least a 0.4% gain or higher in the national consumer price index, but falling clothing prices helped offset food and energy increases, according to the report.
The consumer price increases were the same as those in June and July, keeping the consumer inflation rate at 2.9% through the first eight months of 1994, up only slightly from last year’s figure of 2.7%.
Wells Fargo & Co. economist Gary Schlossberg said the lower-than-expected consumer rate will allow the Fed to delay raising interest rates again when it meets Sept. 27. The next meeting is set for mid-November.
“The Fed will wait to see how the earlier increases will affect the economy first,” Schlossberg said. Energy prices increased 1.4%, largely due to the 3.7% rise in gasoline prices, their biggest jump since a 4.3% increase last October.
Another large jump in coffee prices accounted for most of the 0.3% increase in food prices. Because of worldwide shortages and a freeze in Brazil, coffee prices rose 22% in August on top of July’s record increase of 22.4%.
Johnson said factors such as import prices, industrial prices and employment rates will probably push up consumer inflation in the months to come, raising it to 4% by early next year.
Meanwhile, the Commerce Department reported Tuesday that the U.S. trade deficit jumped in the April-June quarter to its highest level in more than six years, climbing to $37 billion.
The trade deficit, which measures America’s international transactions, was up 14.6% from a first-quarter deficit of $32.3 billion.
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Times Wire Services were used in compiling this report.
