CPI Gains Moderately, Less Than Expected

The coast may be clear for the Federal Reserve to keep lowering interest rates.

The government said Wednesday that consumer prices overall rose only moderately last month, signaling that the central bank has leeway to keep slashing rates without boosting inflation.

The consumer price index rose 0.3% in April, the Labor Department said, less than the 0.4% that many economists had expected.

The index’s gain was dampened as clothing costs fell 1.3%, the steepest drop since 1949, as retailers cut prices to lure shoppers. Also, computer prices eased back 2.2% and are down 26% in the last 12 months.

Offsetting those price drops, energy, medical care and tobacco costs rose.

Measured against their levels in April 2000, prices overall were up 3.3% in April. Though inflation has jumped since 1998--when low energy prices kept the CPI down--the year-over-year rate of increase has dipped from 3.7% in January.

“The numbers reinforce the Fed’s view that inflation will remain contained,” said David Orr, chief economist at First Union Corp. in Charlotte, N.C. “They allow room, if needed, for the Fed to continue to be aggressive” in cutting rates.

The central bank trimmed short-term rates for the fifth time this year Tuesday. In its statement, the Fed said inflation is shackled and hinted that it may act again to breathe life into the economy with lower rates.

Nevertheless, some economists were troubled by the April inflation report, saying it masks price pressures that could surface when the economy rebounds.

“The only good thing about the [inflation report] is that it wasn’t worse,” said Lou Crandall, an economist at Wrightson Associates in New York.

Energy prices rose 1.8% in April, primarily because of a 5% spike in gasoline. In the first four months of the year energy prices jumped at a 10.3% annual clip.

Medical costs rose 0.4% in April and are 4.6% higher than a year ago, the government said.

Rising energy and medical costs are hurting consumers, and they also may pose the greatest threat to U.S. companies’ already fragile profits, experts say.

Some companies, particularly those in California, that are being squeezed by spiking energy prices also must grapple with higher employee medical premiums. That leaves many with unappealing options: try to raise prices, accept shrinking profit margins, or lop off employees to cut costs.

To Californians facing steep hikes in gas and electricity costs--not to mention home prices--inflation seems to be anything but under control.

Interviewed at a downtown Los Angeles gas station Wednesday as they shelled out $2 or more per gallon, some motorists bemoaned the effect on their wallets.

“It seems like everything is going up--gas, cars, clothes,” said Joe Hernendez, 29, a litigation worker in Downey. “For the people who make money, it doesn’t matter. But for those of us who live paycheck to paycheck, we feel even the slightest price increase.”

Agreed Letty Varela, 48, a nurse from San Diego: “I pay so much for so little these days. My dollar doesn’t stretch far enough. It’s unnerving.”

Consumers may believe inflation to be more severe than it is, said Cary Leahey, an economist at Deutsche Banc Alex. Brown in New York.

“The average person thinks there’s a considerably worse inflation story because visible prices like gas and electricity are going through the roof,” Leahey said.

Some analysts warn the economy could be dealt another blow if rising energy prices cause consumers to further rein-in their spending.

“Consumers can afford higher-priced energy for [short] periods,” said Richard Yamarone, economist at Argus Research Corp. in New York. “But when it gets over $2 [for gasoline] for six or nine months, then it’s a real crippling effect.”

Nationwide, the average price of gas was $1.71 a gallon this week, up from $1.40 in late March, according to the Energy Department. In California, the average has spiraled to $1.95 from $1.68.

Some experts see reason for optimism about inflation. The so-called core inflation rate, which excludes the volatile food and energy components, rose a tepid 0.2% in April for the second month in a row and is climbing at a relatively moderate 3.3% annual pace.

More important, the core rate for goods was flat in April and is up only 0.5% in the last year, First Union’s Orr said. The core increase in services costs climbed 0.3% last month and 3.5% in the last year, but many analysts see those pressures easing soon.

“These worries about inflation make no sense to me at all,” said Jim Glassman, economist at J.P. Morgan Chase & Co.

Others, however, fear that the Fed may be dropping interest rates too aggressively in its campaign to prop up the economy.

They say lower rates, coupled with President Bush’s likely tax cut, will kick in by the middle of next year. That could overstimulate the economy and force the Fed to backtrack by raising rates again.

Meanwhile, a separate report Wednesday showed that housing remains an oasis of strength that is playing a big role in keeping the economy out of recession. The Commerce Department said housing starts rose 1.5% in April to an annual pace of 1.609 million units. Low interest rates and a still-sturdy job market have prompted Americans to keep buying new homes.

Times staff writer Sarah Hale contributed to this report.