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Consumer inflation remains barely visible in June

July 16, 1997

WASHINGTON (AP) _ Falling prices for airline tickets, clothing and gasoline helped keep inflation barely visible in June, holding the inflation rate for the first half of the year to just 1.4 percent. Wall Street applauded the news, sending stock prices into record territory.

The Consumer Price Index inched upward a seasonally adjusted 0.1 percent last month, the Labor Department said today. That’s the same as every other month this year, except February when prices increased 0.3 percent.

Inflation for the year so far _ the best for any first half since 1986 _ is markedly lower than the 3.3 percent price increase for all of last year.

In response, the Dow Jones average of industrial stocks shot to 8,014 at midday, up 39 points from Tuesday’s record close. Interest rates fell in the bond market as prices rose. Yields on 30-year Treasury bonds were 6.49 percent, the lowest so far this year.

``It’s the summer time and the living is easy,″ said economist Robert G. Dederick of Northern Trust Co. in Chicago. ``Inflation remains a persistent non-problem. Inflation worriers continue to scratch their heads.″

Much of the inflation restraint in June came from falling energy prices and stable food prices. But even excluding food and energy, the first-half inflation rate was just 2.4 percent.

That compares with a 2.6 percent rate for all of last year and was the best for the first six months of any year since 1965. Economists consider this so-called core rate to be a better measure of inflation trends than the full index.

Inflation’s tameness, according to analysts, is the key ingredient underlying this year’s phenomenal economic performance. Though unemployment is near a 24-year low, the absence of inflation has permitted the Federal Reserve to let the strong growth roll into the summer with just one inflation- and growth-dampening quarter-point increase in interest rates in March. Low interest rates, in turn, have fueled the powerful stock market rally.

In a separate report today, the Federal Reserve said production at the nation’s factories, mines and utilities rose a moderate 0.3 percent in June following a 0.2 percent gain in May.

Capacity utilization held steady at 83.5 percent. Economists believe an operating rate of 84 percent or higher signals the development of inflationary bottlenecks in the production pipeline.

Also, the Commerce Department said inventories of goods held on shelves and backlots in May increased a modest 0.2 percent. This came despite a 0.5 percent drop in business sales.

In June, energy prices were unchanged following substantial drops in March, April and May. Gasoline prices fell 0.9 percent and fuel oil was down too. But the cost of natural gas and electricity rose.

For the first half of the year, energy prices fell at an 8.9 percent annual rate after increasing 8.6 percent for all of 1996.

Food prices, meanwhile, rose at just a 0.9 percent annual rate for the first half after an increase of 4.3 percent last year. Much of the increase this year is due to coffee. Poor crops in Latin America have pushed coffee up at a 45.3 percent annual rate so far this year, compared with a 6.7 percent drop last year.

In June, food rose 0.2 percent. Vegetables were more costly, fruit, less. Dairy products fell, bringing the decline for the past eight months to 3.5 percent following an 8.5 percent rise during the preceding five months. Egg prices were down too, but meat prices rose. Coffee rose 5 percent in June alone.

Outside of food and energy, airline fares fell 1.2 percent, the second drop in a row. Tobacco was down 0.9 percent, the largest decrease since May 1993. Clothing costs declined 0.2 percent, even after adjustment for expected seasonal markdowns.

June’s good inflation news sets the stage for Federal Reserve Chairman Alan Greenspan’s semiannual report to Congress next week. Lawmakers criticized Greenspan and his colleagues for raising rates in March but have praised them for refraining from increasing rates since.

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