U.S. Core Inflation Rate Lowest in 34 Years

Consumer prices rose substantially more last year than in 1998 but all the acceleration of inflation was due to sharply higher energy prices, and the nation’s core inflation rate declined to 1.9% in 1999, the lowest since 1965, the Labor Department reported Friday.

For last month alone, the consumer price index increased 0.2%, and the core portion of the index, which excludes volatile food and energy prices, inched up by 0.1%.

“Inflation remains the dog that didn’t bark,” said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. “For all those fearful that the U.S. economy is overheating, the reality is that core inflation fell to a [business] cycle low in 1999, the ninth year of a boom.

“Even more eye-catching, consumer goods prices actually deflated last year. The CPI for goods, excluding food, energy and tobacco, fell 0.4% during 1999, even while consumer spending was jumping 5.5%. We expect any slowdown in consumer demand to lead to even more price discounting.”

Most forecasters, like Steinberg, expect just such a slowing in consumer spending this year. But unlike him, they nevertheless predict that last year’s large increase in oil prices and rising wages will push up the nation’s core inflation rate later this year. The Merrill Lynch forecast calls for inflation to edge lower with both overall inflation and the core rate to be less than 2% this year.

But Federal Reserve Chairman Alan Greenspan, in a speech in New York Thursday night, expressed concern that if economic growth continues at its current fast pace, it likely will worsen inflation sooner or later. Virtually all financial analysts expect Fed officials to raise their target for overnight interest rates by a quarter-percentage point at a policymaking session early next month.

Some analysts have speculated that the policymakers might want to increase the key rate by half a percentage point because there has been little apparent impact on growth from three-quarter-point increases in the second half of last year. But with Thursday’s benign report on inflation, that seems unlikely, other analysts said.

According to the report, the overall CPI rose 2.7% last year, compared with

only 1.6% in 1998. All the acceleration was due to a big swing in energy prices from a decline of 8.8% in 1998 to an increase of 13.4% last year.

Gasoline prices at the pump, which rose 4.1% in December, were up 30.1% over the past 12 months. Nevertheless, the cost of a gallon of gasoline was still 6.1% lower than at its peak in November 1990. Fuel oil prices, which declined 15.2% in 1998, increased 30.9% in 1999, their largest annual advance since a 62% rise in 1979, the report said.

Food and beverage prices increased 2% last year, down from 2.3% in 1998. Housing costs rose slightly less, 2.2% compared with 2.3%. Apparel prices fell 0.5% last year, which didn’t quite match 1998’s 0.7% decline. Recreation costs rose 0.8%, down from 1.2% in 1998.

On the other hand, medical care costs--which in the CPI include only consumers’ out-of-pocket payments, not costs paid by insurers--increased 3.7%, up from 3.4% the previous year. Education and communication prices rose more last year, 1.6%, than 1998’s 0.7% increase.

In a separate report, the Federal Reserve said its index of industrial production, which tracks the output of the nation’s factories, mines and utilities, rose 0.4% last month with a surge in utility production accounting for a large share of the gain. Manufacturing output rose 0.2%, with most of that increase accounted for by high-tech items.

Ian Shephardson, chief U.S. economist for High Frequency Economics Ltd. in Valhalla, N.Y., said that even with last month’s relatively small increase in manufacturing production, “output rose at a 7.3% annualized pace in the fourth quarter as a whole. This was the best performance for two years.”

Industry surveys suggest “manufacturing output will continue to pick up, but this is the only sector [of the economy] with spare labor, so it poses no inflation threat,” Shephardson said.

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Easing Inflation Fears

The “core” inflation rate, excluding food and energy costs, was even lower than expected in December as the consumer price index continued to amaze economists. Industrial production was robust, with the nation’s factories, mines and utilities operating at a higher capacity.Capacity Utilization

December:

81.3%

Consumer Price Index

Percentage change from prior month:

Overall inflation in December: 0.2%

CPI Excluding Food, Energy

Percentage change from prior month:”Core” inflation

in December:

0.1%

Sources: Federal Reserve Board, Bureau of Labor Statistics