In a convincing show of the nation's ability to dodge the troubles that usually plague economic expansions, the government said Thursday that consumer prices stood still in June for the second month in a row.
Government officials said falling prices for gasoline and airline tickets offset rising medical and tobacco prices to keep the consumer price index, the nation's most widely watched inflation measure, from budging even the small amount that analysts had predicted.
Although the overall rate remained unchanged, the so-called core inflation rate--which excludes volatile energy and food prices--rose 0.1%, the same as in May. But even that was below forecasts; analysts had thought it would go up 0.2%.
Coming atop a string of other reports showing Americans continuing to work, earn and spend at a robust rate, the new inflation numbers make it increasingly likely that the 1990s economy will clinch the record for the longest boom in U.S. history early next year.
More immediately, analysts said, the numbers leave the Federal Reserve with little new reason to raise interest rates to keep prices from taking off. The central bank nudged rates up two weeks ago, warning that wages and prices might be about to climb.
"It's hard to find even an inkling of inflation in these numbers or even see where it would come from," said William Cheney, chief economist with John Hancock Financial Services in Boston.
Americans have grown accustomed to getting sunny economic news, but the latest reports still contain some surprises. Take new autos: Although car sales climbed 8% in the quarter ended in June to record highs, prices fell 0.1% at the retail level and a full 1.3% at the wholesale level in June alone.
"Can you imagine that? They actually declined," said Kathleen Camilli, chief economist with Tucker Anthony in New York.
Or take the nation's service sector, long considered insulated from the global competition thought to be holding down product prices. Although the new CPI report shows service prices rose 2.4% over the last year, that was the slowest annual increase in three decades.
"These are surprisingly good numbers, especially given the exceptionally tight labor markets," said Rajeev Dhawan, economic forecasting director with UCLA's Anderson School. "Normally, with markets tight and wages rising, you would expect higher prices, but we are not seeing them."
In fairness, inflation has not vanished altogether and by some other measures may be picking up steam. So far this year, consumer prices have risen at a 2.2% annual rate, compared with a 1.6% rate in 1998, the slowest pace since the mid-1980s.
However, the core inflation rate shows signs of slowing. Core inflation has risen at a 1.6% annual rate this year, compared with a 2.4% rate in 1998, and is on track to rise at its slowest pace since 1965, according to government officials.
Energy prices, especially gasoline, have played a crucial role in freezing the overall inflation rate in recent months. After jumping a record 15% in April, gas prices tumbled 2.7% in May and an additional 3.2% last month. Air fares, which are closely tied to energy costs, followed a similar pattern. Fares, which rose 12.5% in the five months ended in April, fell 4.8% in May and June.
But analysts warned that the energy price decline has ended in recent weeks and that a renewed rise in gasoline and oil costs is likely to nudge July's inflation rate higher.
"June is the last month we'll see flat inflation. Next month's number will be up because energy will be up," said Mark Zandi, chief economist with Dismal Sciences Inc. in West Chester, Pa.
The near-absence of inflation in recent months has helped push up working Americans' purchasing power. A separate government report Thursday showed that workers' average weekly earnings after inflation rose 0.7% in June, their largest gain in 17 months and more than double May's 0.3% increase.
Flat inflation has also been a boon to American investors, but only modestly so Thursday. Both the Standard & Poor's 500 index and the Nasdaq composite index rose slightly, finishing at record levels.
The S&P; gained 11.45 points, or 0.8%, to close at 1,409.62. The technology-heavy Nasdaq was up 21.24 points, or 0.8%, to 2,839.37. The Dow Jones industrial average remained below its record high, gaining 38.31 points, or 0.3%, to 11,186.41. Bonds remained largely unchanged.
Analysts said investor caution could be explained partly by recent energy price increases, which some see as signaling a comeback for depressed Asian nations that will soon begin competing again with the U.S. for resources and markets.
They said it may also be because a portion of the apparent improvement in inflation is the result of changes in the way Washington measures price trends, rather than an actual slowing of price increases.
Whatever the measurement issues, however, analysts said the downward tug on prices is real, and nowhere more so than in such hot areas of the economy as computers and telecommunications.
Government figures show that prices for personal computers have dropped 24% since the start of the year, while those for computer-processing services have tumbled almost 50%.