Consumer Prices Inch Up 2.5%

Consumer prices rose 2.5% in 1995, the lowest rate in nine years and the fourth year in a row that inflation was less than 3%, the Labor Department said Thursday.

The low inflation rate, as measured by the consumer price index, was driven in part by medical costs that rose just 3.9%, their slowest climb since 1972.

The inflation news was even more favorable for Southern California, where housing costs and retail prices have risen hardly at all. Consumer prices in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties rose just 0.8% at the end of 1995, the lowest level since 1961 and the smallest increase of any metropolitan area measured by the department.

At the same time, the Labor Department also reported that the number of workers seeking unemployment insurance in the week ended Jan. 27 dropped to 388,000 from 413,000 the week before. The four-week average edged up to 377,750 from 373,750.

For some economists, the figures are a vindication of the monetary policies of the Federal Reserve Board.

“Inflation is a nonproblem at this point,” said Norm Williams, an economist with First Interstate Bancorp in Los Angeles. “We’re basically feeling the tightening [of interest rates] the Fed did in 1994.”

The good price news comes a day after the Fed, no longer worried about inflation, dropped short-term interest rates by a quarter of a percentage point in an effort to jump-start the nation’s sluggish economy.

Thursday’s inflation report means the Fed has more leeway to lower rates, perhaps by another quarter of a point, economists said.

But the moderate price increases in 1995 were lower than some economists were expecting, adding to concerns that the nation’s economy has slowed a little more than desired.

“You can say it’s a good sign and a bad sign,” said Cynthia Latta, senior financial economist at DRI/McGraw-Hill in Lexington, Mass. “It is desirable to have low inflation. But one of the reasons price increases have been so small is that the economy is slipping, and demand is not very strong right now, making it hard for producers to pass on price increases.”

In a separate report Thursday, the National Assn. of Purchasing Management said its purchasing managers index fell to 44.2% in January from 46% in December, the sixth straight month for a decline--and a further sign of the slowdown.

A reading of less than 50% means manufacturing is shrinking; a reading of less than 44.5% signals a decline in the overall economy.

Economists attributed the decline to sluggish demand for consumer goods. “There’s a necessary inventory adjustment that has to be made, and that will slow production for a while,” Latta said.

For the 12 months ended in December, the consumer price index for all urban consumers rose 2.5% to 153.5, compared with 2.7% in 1994. It was the lowest increase since a 1.1% increase in 1986, a year when oil prices plummeted.

The Bureau of Labor Statistics said food and energy prices acted as a moderating influence on consumer prices in 1995; food prices rose 2.1%, while the energy index fell 1.3%, spurred by a 3.3% decline in petroleum prices.

Excluding the volatile food and energy components, the so-called core CPI rose slightly faster in 1995 than in previous years--3% compared with 2.6% in 1994--mainly as a result of increases in housing costs, apparel and transportation.

Month to month, prices were up 0.2% in December on a seasonally adjusted basis.

About 80% of that jump was attributable to the energy index, which surged 1.2% in December because of bad weather, after dropping 0.9% in November.

In the greater Los Angeles area, consumer prices edged up 0.8% in the 12 months ended in December, the lowest increase since 1961.

Analysts attributed that mainly to the region’s sluggish real estate market and falling housing prices. Although housing prices are not directly included in the consumer price index, they are reflected indirectly in housing costs, which rose 1.3% in 1995.

“Price increases have definitely moderated in the area with the slowdown . . . of real estate and aerospace,” said First Interstate’s Williams.

Other factors contributed to the region’s low inflation: Grocery prices were up just 0.5%, gasoline prices dropped 9% and apparel prices fell 6.2%.

“This has been a very competitive retail market . . . and that may be restraining prices too,” said Tom K. Lieser, associate director of the Anderson Business Forecast at UCLA.

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Low Inflation

The consumer price index rose just 2.5% last year, the lowest rate of inflation since 1986. December-to-December changes in the CPI:

1995: 2.5%

Source: Labor Department

Purchasing Managers Index The index tracks overall business activity of more than 300 industrial companies:

Jan. 1996: 44.2

Source: National Assn. of Purchasing Managers