Saturday, September 16, 2000
Consumers' costs fell in August
Drop reflects reduction in gasoline price
WASHINGTON Consumer prices fell in August for the first time in 14 years, as the biggest drop in gasoline prices since 1991 overwhelmed higher costs for clothes and prescription drugs.
The good inflation news in Friday's report bolstered economists' belief that the Federal Reserve won't need to boost interest rates any more this year to ward off inflation and prevent the economy from overheating.
The Labor Department's Consumer Price Index, the most closely watched inflation gauge, declined by a seasonally adjusted 0.1 percent last month, a better showing than the modest increase many analysts were expecting.
The bottom line: This is a very positive report for consumers. Inflation is tame, and households should continue to enjoy weak or falling prices for many products from PCs to vehicles, said Mark Zandi, chief economist at Economy.com, an economic consulting firm.
August's performance was the first monthly CPI decline since a 0.4 percent drop in April 1986, the government said. That was caused by a collapse in global oil prices to $13 a barrel in April 1986 from around $31 a barrel just five months earlier, economists said.
Economists think that inflation will stay low, but the wild card is energy prices. Besides a temporary dip in gasoline prices in August, energy costs have been surging, with crude oil prices recently hitting $35 a barrel.
Rebounding gasoline and other energy costs are expected to push up the CPI in September, economists said. Many analysts don't think that higher energy prices will have either a worrisome or long-lasting effect on the prices of other products.
Overall energy costs, including home heating costs, could be painful this winter. Still, we're not looking for energy to spark any broader inflationary problems, said Oscar Gonzalez, economist with John Hancock Financial Services.
Economists aren't worried because the core rate of inflation, which excludes volatile energy and food prices, has been remarkably stable. For the fifth month in a row, the core rate rose by a modest 0.2 percent in August, matching analysts' expectations.
The Federal Reserve's six interest-rate increases since June 1999 are working to slow economic growth and keep inflation under control, economists said.
In the first eight months of this year, consumer prices have been rising at an annual rate of 3.4 percent, compared with a 2.7 percent increase for all of 1999. But the pickup has come from higher energy costs, which have resulted from production limits by oil-producing nations and continuing heavy demand in the United States.
An international outcry over soaring energy prices prompted the Organization of Petroleum Exporting Countries to announce Monday that it will boost output.
Energy prices so far this year have been increasing at an annual rate of 14.3 percent, compared with a 13.4 percent advance for all of 1999.
In August, however, energy prices fell by 2.9 percent, led by the biggest drop in gasoline prices since February 1991.
Gasoline prices declined by 6 percent last month, a temporary drop that economists attributed to a number of factors including ex pectations that OPEC would boost oil production and political pressure on refineries to rein in high gasoline prices, particularly in the Midwest.
Still, economists said August's CPI report, based on information from earlier in the month, didn't catch big increases in gasoline and other energy prices late in the month.
In another report, U.S. industrial production rose in August, led by a surge in utility output, the Federal Reserve said Friday. Manufacturing showed little change for a second straight month.
Output at factories, mines and utilities rose 0.3 percent last month after holding steady in July, Fed statistics showed. July production was initially reported as a 0.4 percent increase. In June, output rose 0.3 percent.
Higher interest rates contributed to a slowdown in consumer spending in the second quarter, which could result in production cutbacks and a cooler economy, analysts said.
We're going to see slower growth in manufacturing than we've seen in the last few years because consumer spending is falling off, said Cynthia Latta, an economist at Standard & Poor's DRI in Lexington, Mass.
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