No Sign Yet of Inflation at the Consumer Level

Inflation at the consumer level remained surprisingly tame in January, the Labor Department reported Friday, just a day after Federal Reserve Chairman Alan Greenspan signaled an intent to raise interest rates to combat incipient inflation.

The consumer price index rose 0.2% in January, the third report in as many days to paint a benign price picture. On Wednesday, the government said that import prices rose by just 0.1% in January, markedly less than in the last quarter of 1999. And on Thursday, the Labor Department reported that wholesale prices didn’t rise at all in January.

But the latest good news on inflation did little to calm the financial markets’ fears of higher interest rates, and the Dow Jones industrial average plunged 295 points. A range of other inflation barometers recently have been signaling a build-up in pricing pressures deep in the economy that could eventually work their way to the consumer level.

There were few signs of inflationary pressure in the latest CPI, however. Though gasoline and heating-oil prices continued to soar in January, a sharp decline in clothing prices helped keep the overall inflation rate in check. Clothing prices normally fall in January, when holiday merchandise goes on sale, but this year they fell more than usual because merchants were rushing to clear space for new spring collections.

Some private economists said the rosy-looking inflation data did not necessarily contradict Greenspan’s stormy outlook, since the three price indexes show what has been going on over the last month.

“Greenspan is focusing on the threat of inflation, not that it’s already here,” said David Orr, chief economist at First Union Securities Inc. in Charlotte, N.C. “What the financial markets are all about is the future, which is why they perceive this differently from the person [on] the street.”

A consumer would have spotted unmistakable proof of inflation in January only at the gas pump or in a heating bill. Energy prices were up 14.7% from their level one year earlier, the Labor Department said, and gasoline cost 32.4% more. Other prices--for housing, education and medical care, among other things--also rose in January, but by much smaller amounts. And grocery prices fell.

But tucked into the data on which the inflation indexes are based, at levels of the economy that consumers normally don’t see, were hints of future price increases at the consumer level.

Producer prices are measured at three stages of production--not just at the wholesale level, which immediately precedes retail, but also at the intermediate stage (at which companies sell unfinished goods to other companies) and at the raw-material stage. Though wholesale prices didn’t rise at all in January, raw material prices reached 17% over their level of one year earlier.

And the Labor Department’s intermediate producer price index--excluding food and energy--reached 2.4% beyond its January 1999 level. (Economists say that excluding food and energy from price indices wipes out short-term volatility and gives a clearer picture of long-term trends.)

Yet another new report, by the Federal Reserve Bank of Philadelphia found that 41% of manufacturers in the mid-Atlantic region had paid more for raw materials in January than before.

Though raw-material prices are rising sharply and retail prices are relatively flat, businesses appear unable to pass on cost increases. So far, profitability hasn’t been hurt because productivity is also rising, and because consumer demand remains powerful.

But Orr said he expects some “profit disappointments” in the second half of this year, as producer prices continue to rise and sales volumes taper off.

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CPI Remains Flat

Consumer price index, percentage change from prior month, seasonally adjusted:

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Source: Bureau of Labor Statistics