U.S. Consumer Prices Unchanged in May After April Surge; Core Rate Up 0.1%
By Vincent Del Giudice and Adrian Zawada
U.S. Consumer Prices Unchanged in May; Core Rate Rises 0.1%
Washington, June 16 (Bloomberg) -- The U.S. consumer price
index was unchanged in May after surging in April, and its core
rate rose less than expected, casting doubt on an immediate
Federal Reserve interest rate increase to guard against
inflation.
The CPI was flat in May after rising 0.7 percent in April,
the biggest gain in nine years, the Labor Department said. The
core rate, which excludes food and energy prices, rose 0.1
percent after increasing 0.4 percent a month earlier. Analysts
expected both rates to rise 0.2 percent in May.
The smaller-than-expected CPI means a Fed rate increase
might not be as imminent, as investors feared.
''We're looking at a situation now where the Fed doesn't
have to panic,'' Anthony Chan, chief economist at Banc One
Investment Advisors in Columbus, Ohio, said before the report.
''Maybe prices will be a little higher this year, but not at a
level that is consistent with type of growth we're seeing.''
Through May, the CPI increased at a 2.6 percent annual rate,
up from a 1.6 percent pace during the first five months of last
year. At the same time, the core rate of the CPI has risen at a
1.8 percent annual rate, down from a 2.7 percent pace during the
first five months of last year.
May's overall reading was the lowest since March 1998, when
the CPI also was unchanged.
Energy prices, which account for about a tenth of the index,
fell 1.3 percent during May, reflecting the largest drop in
gasoline costs since March 1998. Food prices, which account for
about a fifth of the index, increased 0.4 percent last month, led
by a rise in the cost of fresh vegetables and fruits. Energy
prices rose 6.1 percent in April and food costs rose 0.1 percent
that month.
Other Prices
Housing costs, which make up two-fifths of the CPI,
increased 0.1 percent in May. Medical care costs rose 0.2
percent, led by a 0.4 rise in the cost of prescription drugs.
Prices of personal computers fell 1.9 percent in May after a 3.5
percent drop the previous month. Personal computer prices are on
a pace to fall 30.7 percent in 1999 after falling 35.8 percent
for all of 1998.
Clothing prices fell 0.2 percent in April, after rising 1.5
percent in April. The gain in April, the largest since March
1990, followed price cuts earlier in the year as clothing stores
try to sell off excess inventories.
Tobacco prices fell 1.4 percent in May after rising 3.6
percent a month earlier. The April increase in tobacco prices
followed two months of declines that were due to discounting by
tobacco companies after they raised prices late last year.
RJR Nabisco Holdings Corp., the No. 2 U.S. cigarette maker,
was offering a 55-cent-a-pack discount on their major brands -- a
move aimed at keeping smokers after prices were raised by 70
cents last year to pay for the industry's $206 billion legal
settlement with states.
Effect on Markets
After the April CPI report, 30-year Treasury bonds suffered
the biggest rout in almost three years, driving the yield 17
basis points higher to 5.92 percent.
Since then, the bond's yield has risen 15 more basis points,
crossing the 6 percent mark last week for the first time in more
than a year. The Dow Jones Industrial Average has fallen 4
percent since closing at a record high 11113 on May 13, the day
before the release.
At the last meeting of the Federal Open Market Committee, on
May 18, central bankers adopted a bias toward raising the
overnight bank lending rate to cool the economy -- and hold
inflation at bay.
The nation's ''lucky streak'' with low prices is probably
over, Atlanta Federal Reserve Bank President Jack Guynn said in a
speech yesterday.
''In my judgment, the risks are currently weighted toward
the possibility, though not the inevitability, of growing
inflationary pressures,'' said Guynn, who participates in Fed
interest rate discussions but doesn't vote.
Fed and Inflation
If Fed policy-makers do decide to raise interest rates this
month, measured inflation will be lower than at any time the Fed
under Chairman Alan Greenspan was acting to apply the brakes. In
May, the CPI was 2.1 percent higher than May a year ago. In March
1997, the last time the Fed raised the overnight bank lending
rate, the CPI was 2.8 percent higher than 12 months earlier.
During the last sustained series of Fed rate increases from
the beginning of 1994 into early 1995, the CPI measured year over
year averaged about 2.7 percent, falling as low as 2.3 percent
for one month in May 1994.
A series of Fed increases from early 1988 through early 1989
corresponded with an average year-to-year rise in the CPI of 4.3
percent.
Recent government reports suggest the best news on inflation
is over. On Friday, the Labor Department reported producer prices
rose 0.2 percent in May, the third monthly increase in a row, led
by higher food costs. The core rate, which excludes food and
energy prices, rose 0.1 percent.
Raw Materials
In addition, the costs of raw materials rose at the fastest
rate in 2 1/2 years, reflecting increases for oil, natural gas,
scrap metals and hogs and poultry, the government said.
For the year to date, the PPI has increased at a 2 percent
annual rate after falling at a 1.5 percent pace through May 1998.
At the same time, the core rate of the PPI is unchanged after
rising at a 1.9 percent pace through last May. For all of last
year, the producer price index fell 0.1 percent, after declining
1.2 percent a year earlier.
In addition, the cost of imports rose 0.7 percent in May,
the third monthly increase in a row. Excluding petroleum, import
prices rose 0.1 percent last month, the first increase since
January.
While those prices are still declining when measured year
over year, the rate of decline slowed to 2 percent last month --
close to levels in August 1997 at the outset of the Asian
financial crisis. The trough in import prices came in September
1998, when year-over-year price levels declined 4.2 percent.
Subdued import prices since the second half of 1997, when
slower growth began to grip some Asian, Latin American and
European economies, have helped restrain U.S. inflation by making
it difficult for companies to boost prices. An increase in import
costs could allow U.S. companies to increase prices on their
goods.
Labor Costs
Rising labor costs also could pressure companies to start
raising prices. Last Friday, the Labor Department reported that
the U.S. unemployment rate fell to 4.2 percent in May -- tying a
29-year low -- and average hourly earnings accelerated. With help-
wanted signs out, companies were forced to keep their existing
employees on the job longer during May. Average weekly hours and
manufacturing overtime both increased.
One industry in which wage increases are expected is housing
as builders compete to find enough workers to complete huge
backlogs of homes. The median price of new homes rose 0.3 percent
in April to a record high $159,500, as sales soared to their
second-highest level ever.
''Housing is in a bout of overheating conditions'' and ''is
the first place I'm going to look'' for signs of inflation,''
Chan said.
Broad Gauge
The CPI is the government's broadest gauge of costs for good
and services. About 55 percent of the CPI covers prices consumers
pay for services, ranging from medical visits to airline fare and
movie tickets. Goods, ranging from food and clothing to autos and
appliances, account for the rest.
The cost of transportation fell 0.5 percent last month,
including a 0.1 percent drop in new vehicle prices.
Airfares fell 2.5 percent in May after rising 2 percent in
April. And they probably will drop further. UAL Corp., parent of
No. 1 carrier United Airlines, and US Airways Group Inc., cut
fares to spur summer travel after announcing last week that
second-quarter profit will fall below analyst forecasts because
of lower-than-expected demand.
Until last week, airlines have increased their U.S. business
fares 3 percent this year and leisure fares 11 percent after
failing to get increases to stick in 1998. The recent price
breaks cut about 25 percent off some summer leisure fares. Other
airlines that followed United's lead were Delta Air Lines Inc.,
the third-largest U.S. carrier, No. 4 Northwest Airlines Corp.
and No. 5 Continental Airlines Inc.
Gasoline prices settled down after rising a record 15
percent in April, which accounted for more than half of that
month's overall CPI advance.
Crude oil futures prices rose to a 17-month high of $18.98 a
barrel on May 5. The Organization of Petroleum Exporting
Countries and other producers earlier this year agreed to reduce
world oil output by 2.7 percent to spur demand. That sent crude
oil prices higher from less than $12 a barrel in February.
Meantime, the average retail price of a gallon of unleaded
gasoline rose to $1.14 in late April and again in mid-May, the
highest since December 1997, according to Department of Energy
figures.
And natural gas prices rose in May amid expectations for
strengthening demand from electric utilities during unseasonably
hot weather, which boosts air conditioning use.
Looking ahead, some energy costs have declined so far in
June, particularly retail gasoline prices, which fell last week
to about $1.11 a gallon, the lowest in two months. Wholesale
gasoline prices, as measured through New York Mercantile Exchange
futures contracts, have risen 12 percent so far this month,
however. And, after declining in latter part of May, crude oil
futures are up 14 percent this month, closing at $18.55 a barrel
yesterday -- almost back to the recent peak.
Last month, Minneapolis-based General Mills raised prices
for its U.S. cereals by an average 2.5 percent in order to
generate more money for advertising and promotional spending.
Kellogg earlier raised its prices 2.7 percent.
''The competitiveness of the cereal category has not abated,
and we have yet to see if the benefits will outweigh the costs,''
said analyst David Nelson at Credit Suisse First Boston.
The success of discounters like Wal-Mart, as well as cheap
apparel imports, are key factors holding down prices, said
Michael Niemira, senior economist at Bank of Tokyo-Mitsubishi in
New York.
''There's nothing in the works to push prices up,'' Niemira
said. ''So new merchandise will be pacing the old prices.''
Sears, Roebuck & Co. is focusing its sales efforts --
including price cuts -- on basic, casual apparel.
''We want to reflect that our customers' lifestyles, both at
work and at home, is more casual,'' said company president Arthur
Martinez. ''Basics is where we expect to have our price rollbacks
really take effect.''
More expensive retailers have also been restrained from
increasing prices. Saks Inc., the owner of Saks Fifth Avenue and
regional department stores, said last month it held down
inventory costs and cut fewer prices.
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