1997 Inflation Rate at 11-Year Low; More Slowing Seen

Prices for consumers rose a scant 1.7% in 1997--the lowest inflation rate in 11 years--and economists are saying the Asian financial crisis could further slow the growth in prices this year.

Because the dollar is gaining in value compared with many Asian currencies, such items as imported cars, computers, toys and clothing will be relative bargains in coming months, experts believe.

The consumer price index--the government’s measure of inflation’s impact on the average urban resident--actually declined by 0.2% during December due to steep drops in food and energy costs, the Labor Department reported Tuesday.

The full year’s inflation rate of 1.7% was the lowest since 1986, when a decline in the oil market caused overall prices to rise just 1.1%. Even more impressive, the core inflation rate--the figure for all goods and services except the volatile food and energy categories--advanced 2.2%, its slowest pace since 1965.

The overall 1997 CPI figure represents a substantial improvement for consumers from 1996, when prices climbed 3.3%.

The slowdown in 1997 was prompted by food and energy costs. Grocery store prices rose a negligible 1%, compared with a 4.9% jump in 1996. Energy prices dropped 3.4%, in sharp contrast to a gain of 8.6% a year earlier.

The trend is expected to continue this year. Initial inflation estimates for 1998 had suggested a CPI rate of 2.5%, “but clearly it will be 2% or lower” because of the reduced prices of imports from Asia, predicted Dean Baker of the Economic Policy Institute, a Washington think tank.

With inflation seemingly no threat, analysts said it is unlikely the Federal Reserve Board will consider raising interest rates any time soon, the tactic it uses to slow the economy and dampen price increases.

“I think the Fed is probably going to sit still for as long as it can in 1998,” predicted Lyle E. Gramley, chief economist for the Mortgage Bankers Assn. and a former member of the Fed.

The financial crisis in Asia and the resulting drop in prices for goods imported into the U.S. “will take some of the heat off the Fed,” by reducing any inflationary pressures, said Barry Rogstad, president of the American Business Conference, a group of 100 high-growth firms.

Now, the debate may swing in the other direction, with Fed critics asking the central bank to reduce interest rates as a spur to keep the economy thriving. In its last action, the Fed raised rates in March, from 5.25% to 5.5%.

U.S. workers, who had seen their buying power steadily erode, are making up some of the lost ground because wage increases are now outpacing prices.

Average hourly earnings rose about 3.7% last year. The 1.7% rise in the cost of living means the average worker increased his or her purchasing power by 2%, noted Baker of the Economic Policy Institute. Real wages (buying power adjusted for inflation) fell in the late 1980s and early 1990s, but have been edging up for the last four years.

“The good news is we are seeing increases but we have a long way to go to make up lost ground,” because wages, adjusted for inflation, still lag behind 1989 levels, Baker said.

To the surprise of most economists, the low inflation has been accompanied by low unemployment, with a national jobless rate of 4.7% in December. In defiance of conventional wisdom, tight labor markets have not caused a burst of inflation, with higher wages generating higher prices. Instead, wage growth has been moderate, and companies have been loath to pass through higher costs in the form of higher retail prices.

Of late, there has been some discussion of deflation, an across-the-board drop in prices, but most experts dismiss this as unlikely. Most of the economic activity in the United States is composed of services, and the price of services climbed 3.5% last year, according to economist Gramley. The chance of an actual drop in overall prices, a yearly decline in the CPI, is “quite remote--the chances are one in 100,” Gramley said.

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Consumer Price Index

Monthly percentage change, seasonally adjusted: Dec: 0.1%

Source: Bureau of Labor Statistics