Inflation Takes Month Off; CPI Unchanged
Inflation, which seemed to be taking off with a vengeance in April, stopped dead last month, reassuring nervous investors and reviving the mystery of how the U.S. economy can be operating at its spectacular pace without overheating.
Falling energy prices offset rising food prices to leave the government’s chief inflation gauge, the consumer price index, at the same level in May that it reached in April, the Labor Department said Wednesday. Perhaps as important, the so-called core inflation rate, which excludes energy and food prices, rose at its slowest annual rate since the early 1960s.
“The message, amazingly enough, is that inflation is still not a problem,” said Cynthia M. Latta, chief U.S. economist with Standard & Poor’s DRI in Lexington, Mass.
By reopening the question of whether inflation is beginning to take off, the new report will make it a little harder for the Federal Reserve to raise interest rates when its policymaking committee meets June 29. Fed Chairman Alan Greenspan is expected to lay out the case for at least a modest increase when he testifies today before the congressional Joint Economic Committee.
News that consumer prices did not budge in May--after a 0.7% increase in April--sent the stock market into orbit.
Most analysts had predicted that Wednesday’s report would show an increase in consumer prices of about 0.3%. Other economic data released Wednesday showed the kind of continued strong economic growth that seems likely to push prices up eventually.
The Fed issued its so-called beige book, its eight-times-a-year report on business conditions around the country, and the document was chock-a-block with illustrations of an economy running flat-out.
“Labor markets were extremely tight last month . . . with no signs of easing in the foreseeable future,” the report said. “Despite the summer influx of student workers, temporary employment firms . . . have been unable to fill all their job openings.”’
“As an employment agent in northern Virginia put it: ‘Anyone that can operate a personal computer can get a job.’ ”
In a separate signal, the Commerce Department reported that housing construction jumped 6.3% in May after three months of decline.
Wednesday’s report on consumer price inflation showed that the price of virtually every product that contributed to April’s abrupt increase in the price index tumbled in May.
Gasoline and other energy prices, which leaped an eye-popping 17% in April, slid 1.3% in May. Airline fares, which rose 2% in April, fell 2.5%. Clothing prices, which were up 1.5% one month, were down 0.2% the next.
So pronounced was the about-face in price trends between the two months that some analysts questioned whether the changes signaled a problem in the government’s inflation-measuring methods.
“It seems to imply there’s something wrong with their seasonal adjustment or something,” said Donald Ratajczak, economic forecasting director at Georgia State University.
But even with sharp differences between April and May, many analysts said the overall trend was clear: “Inflation is gradually moving higher,” said Richard B. Berner, chief U.S. economist with Morgan Stanley Dean Witter in New York, reflecting a broad consensus among business analysts.
Inflation rose 2.1% in the 12 months ended in May, according to the Labor Department.
Since January, it has been rising at an even faster 2.6% annual rate, department figures show. That compares with a paltry 1.6% rate during 1998.
Analysts said the trend toward slightly higher inflation has probably persuaded Greenspan and the Fed to raise interest rates when policymakers meet this month. But they added that the flat May numbers make it likely that the increase would be small, perhaps no more than a quarter of a percentage point, and would not be the first in a series.
“This takes some of the urgency out of the Fed acting,” Latta said.
