Consumer prices show inflation still is dormant Retail index climbed 2.5% in 1995, smallest increase since 1986

February 02, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

Who would have predicted it? Not two decades ago, gold sold for $700 an ounce, oil cost $35 a barrel and mortgages cost 15 percent per year.

Today, gold goes for $407 an ounce. Oil costs $18 a barrel. Mortgages are 7 percent.

Price inflation -- eroder of paychecks, elevator of interest rates, foe of capital -- continues its tame ways.

The country passed another inflation landmark yesterday, as the Labor Department announced that the consumer price index rose by less than 3 percent for the fourth year in a row in 1995.

That's the best showing in 30 years and a steep pitch down the fever chart from the early 1980s, when annual price increases ran to double digits, when inflation confounded experts by bubbling up even in recessions.

"Inflation is under control throughout most of the world," said George Roche, president of the New Era Fund, a T. Rowe Price mutual fund that invests in oil producers, gold mines, agricultural firms and other natural resource companies.

Retail prices rose by just 2.5 percent last year -- the smallest increase since 1986, the Labor Department said. Inflation for December was 0.2 percent despite a temporary spike in energy prices.

By contrast, retail inflation in 1979 was 11.3 percent; in 1980, 13.5 percent.

Economists were especially pleased by low inflation last year in health care, a sector that had resisted attempts at price pruning. Physician fees, hospital charges and other medical costs increased by 3.9 percent in 1995, the smallest boost since 1972. That bodes well for health-insurance buyers, analysts said.

Last year's showing came in the fifth year of an economic expansion, a part of the business cycle that the textbooks say bears a higher-than-normal risk of economic "overheating" and inflationary pressure. So yesterday's statistics were even more impressive, economists said.

Not everybody is complacent. Financial analyst James Grant said he is "agnostic" about whether inflation will ignite enough to hurt the economy in the next few years. But the economy bears enough inflationary buds that investors may be able to make money in well-placed raw-materials investments, he added.

"So unpopular is the idea of inflation that people have allowed their inventories of raw materials to run down to very low levels," said Mr. Grant, publisher of the newsletter Grant's Interest Rate Observer. "Grain inventories stand at 20-year lows with respect to consumption."

With meager supplies, he said, it doesn't take much disruption to foster scarcity and higher prices.

Even so, many analysts expect that prices will stay under control. The strong global forces that have dampened inflation for more than half a decade continue to press down, they said. The apparently slowing U.S. economy is expected to assist them.

"The basics for structural low inflation are likely to stay in place for a number of years," said David Donabedian, chief economist for Mercantile Bankshares Corp. "From now until the end of the decade, we are unlikely to see a return to the hyperinflation of the late '70s and early '80s."

Many economists credit recent Federal Reserve chairmen -- Paul Volcker, followed by Alan Greenspan -- with bringing inflation to bay. But the Fed has come under sharp criticism from people like Maryland Sen. Paul Sarbanes, a Democrat who believes the central bank has traded economic growth and jobs for the interests of the monied class.

Bond investors dislike inflation because it erodes the value of their securities. In response they typically raise interest rates, which increases borrowing costs for businesses and consumers.

Middle Eastern oil embargoes and deficit spending on the Vietnam War and federal social programs helped drive annual inflation toward double digits in the 1970s. After initial paralysis, fTC the Fed under Mr. Volcker clamped down. It drove interest rates to all-time highs in an attempt to stun the economy and release inflationary pressures.

It was strong medicine. The prime rate got as high as 21 percent in 1980. (It is now 8.25 percent.) And side effects were severe, as the nation experienced bad recessions in the late 1970s and early 1980s.

Mr. Greenspan, who took over in the mid-1980s, continued the Fed's price hawkishness even as inflation dipped to the mid-single digits.

As the 1980s ended, forces were building that would continue to press inflation down.

One was the growing global competition for wages. As manufacturers place plants wherever labor is cheapest, workers' power to demand raises has weakened. Since labor makes up about two-thirds of the economy, stress on factories to increase prices has plunged.

At the same time, workers who don't get big raises are less willing to accept stores' price increases. Discount shopping has become increasingly popular, even when the economy grows. Corporate restructuring and layoffs "have been going on here for years, but now they're taking hold in other countries, in Europe and Japan," said Mr. Donabedian.

True, industrial materials rose in price last year. But they've fallen sharply as the economy has faltered, a trend reinforced by results announced yesterday by the National Association of Purchasing Managers.

Grain supplies indeed are low, as Mr. Grant noted. But even if crop prices rise, producers will be hard-pressed to pass the increases onto consumers, Mr. Donabedian said.

Gold has been rising, and gold typically is a harbinger of prices generally. Not this time, several economists said. They attributed increased demand for gold to hording and jewelry demand in Asia and to speculative buying by investors.

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