Consumer Prices Surge 0.6% in Jan., Adding to Burdens of U.S. Economy
Pushed by soaring energy costs, consumer inflation took an unexpected leap in January, piling one more burden onto the struggling U.S. economy and possibly limiting the scale of future interest-rate cuts by the Federal Reserve.
The 0.6% price surge stirred anxieties about stagflation--the combination of rising prices amid sluggish economic activity. But economists Wednesday sought to play down such concerns, maintaining that energy costs would subside and predicting further interest-rate cuts by the Fed.
“These [inflation] numbers are going to cause a lot of consternation,” said Brian S. Wesbury, chief economist at the Griffin, Kubik, Stephens & Thompson investment bank in Chicago. “But I think the fears of inflation are unwarranted.”
Economists said that the January surge in consumer prices was largely driven by the cost of energy, particularly natural gas. Natural gas prices have fallen rapidly in recent weeks, and crude oil prices fell Wednesday to a six-week low.
At the same time, some said that a pattern of rising prices for services was less easily dismissed and that the risks of rising inflation outside the volatile energy category might restrain Fed interest-rate moves.
Medical costs rose 0.6% last month, after a 0.3% rise in December. Prescription drug prices jumped 0.7%. Physicians’ and hospital services went up 1%.
“The energy component is largely transitory,” said David A. Ingram, a senior economist at Economy.com, a private firm in West Chester, Pa. “What I’d be more concerned about is the rise in service costs, and health-care costs in particular.”
Separately, the Commerce Department said America’s trade deficit rose to an all-time high of $369.7 billion last year even though the December deficit shrank for a third straight month.
The trade deficit for all of 2000 was 39.5% higher than the previous record, a $265-billion deficit in 1999. At the same time, the trade gap for December eased slightly--0.4% to $33 billion--as subdued U.S. consumers bought fewer foreign goods.
Last month’s increase in the consumer price index was the largest since March. The inflation report showed a spectacular 17.4% rise in natural gas costs, an expense that has pushed monthly household gas bills over $300 in many regions.
Inflation for January was twice the level expected by many private forecasters. Even the “core” inflation rate, which excludes the frequently changing prices of energy and food, rose a substantial 0.3%.
The 0.6% rise in the overall CPI, which would translate into an annual pace of 7.8%, followed an even bigger 1.1% surge in wholesale prices last month, sparking further questions about the inflation picture.
Still, many believe the U.S. economy has become increasingly competitive in recent years, making it much harder for firms to pass along price increases without running into sharp resistance from consumers. As a result, the recent glimmers of inflation are greeted skeptically by some.
“I don’t think this report is a harbinger of inflation--or stagflation for that matter,” Wesbury said. “I look at this as more of an aberration in the long-term trend.”
For now, inflation strikes some as far less of a concern than signs that the economy is on the brink of a significant downturn.
“It really shouldn’t make any difference at all to the Fed,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in the New York suburb of Valhalla. “It was not a great number,” he added, “but the Fed has a much bigger problem to deal with. When the sky is falling you don’t care if your lawn isn’t being mowed.”
For all that, however, some maintained that the Fed would move more gingerly. Wednesday’s report “will concern the Fed” and could reduce the size of the next expected rate cut to a quarter point rather than half a point, Wesbury said. The Fed’s policy-setting committee is scheduled to meet again on March 20.
In two steps last month, Federal Reserve officials slashed interest rates by 1 percentage point, a dramatic statement of concern over the deteriorating economic picture. But in his semiannual review of the economy last week, Fed Chairman Alan Greenspan suggested that the economy, which hit a wall at the end of 2000, retained glimmers of life, and that unpredictable consumer confidence would play a crucial role in whether it skirts a recession.
Ordinarily, the recent reports on inflation would be enough to dissuade most Fed officials from further rate cuts, out of fear that lower rates would heat up the economy and spark inflation. Fed officials have said that the generally subdued inflation picture has made it easier to cut rates aggressively.
But the economy is so beset by other pressures that analysts doubt such concerns will dominate Fed decision-making in the near future. Plunging consumer confidence, rising layoffs, a slumping manufacturing sector, reduced business investment, unsold inventories and tighter credit standards at banks are among the current problems.
“We’re at a fork in the road,” Shepherdson said. “Consumer confidence has fallen, but not to the level of a recession. If it falls in the next couple of months as it has in the last couple of months, then it will be a recession. There will be no way to avoid it.”
Not all prices went up in January. Clothing costs slipped 0.2% in January, following a 0.3% decline in December, as recession-wary retailers slashed costs to keep apparel from piling up on shelves. In a similar response to wary consumers, the cost of personal computers fell 4.1% after dropping 2.1% in December.
In the five-county Los Angeles area, consumer prices rose 0.4% in January--the equivalent of 5% over a full year. That is noticeably above the actual 3.8% CPI over the last 12 months in Los Angeles, Orange, Ventura, Riverside and San Bernardino counties.
January’s increase in Southern California stemmed primarily from higher housing, food and beverage costs. In energy, a much smaller component of consumers’ budgets, the fuels and utilities category jumped a steep 3% for the month as rising electricity costs offset a slight decline in natural gas prices.
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Times staff writer Stuart Silverstein in Los Angeles contributed to this story.
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Consumer Price Index
Monthly percentage change, seasonally adjusted:
January: +0.6%
Source: Bureau of Labor Statistics
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U.S. Trade Deficit
The overall gap continues to reflect a deficit in the trade of goods and a surplus in services. Quarterly balance in billions of dollars:
December: -$33.0 billion
Source: Commerce Department
