Inflation Slows as Retail Prices Hold Steady for 3rd Straight Month

More evidence emerged that inflation has slowed significantly since the spring when the government reported Wednesday that consumer prices rose just 0.1% in August. It was the third straight month of modest increases.

The Federal Reserve added to the bullish economic news, saying in its periodic “Beige Book” report that the economic expansion kept rolling in most parts of the country last month with little sign of price pressures.

In the Los Angeles area, the Labor Department said, prices paid for goods and services declined 0.1% in August, following a 0.2% decline in July.

Nationally, tumbling vegetable prices and airline fares, plus the biggest drop in gasoline prices in 4 1/2 years, combined to offset rising clothing, medical care and tobacco costs in August, the department said. The consumer price index rose 0.2% in July and 0.1% in June. After factoring out volatile food and energy costs, the closely watched “core” CPI rose 0.2%, the same increase as in the previous three months.

“We’ll continue to see a relatively tranquil number from here on,” said Darwin Beck of First Boston Corp. On Tuesday, the government said wholesale prices fell 0.1% last month, the third month in which those prices did not rise.

The Fed survey, compiled from reports from the Fed’s 12 regional banks, said construction activity was strengthening in many parts of the country. The Chicago and St. Louis districts noted strong home sales, and Cleveland, Atlanta and San Francisco reported a rebound in non-residential construction.

The central bank also noted that a steep slide in manufacturing appeared to be bottoming out, and it blamed temporary weather factors for reports of weakness in retail sales and farming.

Analysts said the price news gives the Fed room to cut interest rates another notch. Price-conscious consumers, low labor costs, a stronger dollar and an economy not galloping out of control are helping to keep a lid on inflation.

In particular, the moderation in prices since May reflects lower used car prices and auto-finance charges and smaller increases in airline fares, the department said.

Over the past three months, the CPI has edged up just 1.9%--a marked slowdown from the 3.5% increase for the three months ending in May.

Over the past year, the CPI has risen just 2.6%, the slowest 12-month pace since June 1994. It rose 2.7% in all of 1994.

“I think we continue to be in the position that we have been, which is solid growth and moderate inflation,” Treasury Secretary Robert Rubin told reporters in Atlanta.

Fed officials meet Sept. 26 to debate interest-rate policy. Analysts are split about whether the central bank will cut rates then.

The Fed trimmed short-term rates by a quarter of a percentage point in July to breathe new life into the economy. It was the first cut in nearly three years, and since then, the economy has shown signs of accelerating.

But most economists downplay the chance of a significant pickup in inflation any time soon.

“The economy is improving, but not at a pace that is going to stir price pressures quickly,” said Richard Berner of Mellon Bank Corp.

Part of the reason is that labor costs have been held down. The Labor Department said Wednesday that workers’ average weekly earnings, after adjusting for inflation, fell 0.9% in August after rising 1.0% in July. Earnings were down 0.1% last month from a year earlier.

The CPI showed that energy prices fell 0.8% for the second straight month in August. Gasoline prices tumbled 2.9%, the biggest drop since a 4.6% decline in March, 1991.

Food prices rose 0.2%, the same as the July increase. Vegetable prices slid 3.8%, led by a 24.8% plunge in tomato prices. That is the largest fall in tomato prices since a 26.6% drop in February, 1994.

Airline fares fell 3.5% last month. But tobacco prices rose 0.6%, and clothing prices rose 0.3%, the second straight monthly increase.

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Consumer Prices

Percentage change, month to month, seasonally adjusted:

August 1995: 0.1%

Source: Labor Department