U.S. reports rise in pay, no inflation

Consumer Price Index unchanged in June, but wages grew 0.7%

Rate rise is held less likely

With labor in demand, increase in earnings is largest in 17 months

July 16, 1999|By William Patalon III | William Patalon III,SUN STAFF

Consumer prices held steady in June despite the biggest wage rise in 17 months, leaving economists to puzzle over the absence of inflation in an economy that continues to zoom.

The Consumer Price Index, the broadest measure of what people are paying for products and services and a gauge of inflation, was unchanged for a second straight month, the first time that has happened since November-December 1962, according to the Labor Department.

The index had increased 0.7 percent in April, indicating that inflation might have returned.

In a separate report, the Labor Department said earnings rose 0.7 percent in June, the biggest increase since a 0.8 percent rise in January 1998.

Wages had risen 0.3 percent in May, underscoring a tight labor market in which workers were getting raises, particularly by job-hopping.

"The economy seems to be defying gravity," said Mark Vitner, an economist and vice president with First Union Corp. of Charlotte, N.C. "The things that should be [present] -- bringing the economy down -- high employment, higher inflation, higher interest rates" aren't appearing or are having little impact.

Analysts hope the benign inflation numbers will deter the Federal Reserve from raising interest rates next month or at least result in a minimal increase, which was the case in June.

Stocks rallied slightly. The Dow Jones industrial average closed at 11,186.41, up 38.31. The Nasdaq composite rose 21.24 to close at 2839.37. Through June, the CPI had increased at a 2.2 percent annual rate, accelerating from a 1.6 annual rate for the first six months of last year.

Wages and inflation -- which typically move together -- are perhaps the categories most watched by Federal Reserve Chairman Alan Greenspan.

Greenspan, an avowed inflation-fighter, is "experimenting" to see how much growth can be allowed without having inflation return, said James E. Annable, a BankOne Corp. economist.

It's not the numbers that matter; it's how the forces that lead to them interact. Economists say Greenspan cares more about what inflation will be, say, a year from now, than he does about yesterday's reports.

Economists have traditionally viewed low unemployment -- the rate is now 4.3 percent -- as highly inflationary because it creates a shortage of labor that leaves companies competing for workers, boosting wages in the process.

Wage increases spawn inflation in several ways: First, the companies have to recoup their higher costs by raising prices; second, higher wages create a situation in which more dollars are chasing fewer goods, which fuels price increases.

`Hard to believe'

"The lack of inflation is a consistent source of surprise," said Mark Zandi, an economist with WFA in West Chester, Pa. "The continued stellar inflation numbers are still hard to believe."

Consistent increases in productivity may be the reason for that constant surprise.

Innovations such as the Internet have made many tasks easier by linking computers -- and workers -- into powerful communications networks.

Computers have enabled companies to do more with less, keeping costs down, managing inventories better and becoming much nimbler because it's easier and faster to obtain information about sales, market-share changes or moves by the competition.

If higher productivity shaves costs enough to outrun the wage increases, there is no inflation. First Union's Vitner said that is happening, heightened by the fact that technology, though the fastest-growing part of the economy, is also the part where costs are falling the fastest because of competition.

Computer prices down

In June, prices for computers and peripherals fell 2.2 percent. Overall, PC prices have been in a free fall, to the point that some online services are offering them free in return for a long-term subscriptions.

BankOne's Annable said labor-cost concerns are overblown. He said the wages of any year are, on average, based on the inflation rate of the previous year. Because last year's rate was low -- about 1.5 percent -- this year's wage raises also will be modest. The labor squeezes tend to be in specialized areas, such as computer programming, he said.

Yesterday's CPI report also showed energy prices had fallen for the second straight month, dropping 1.3 percent in May and 1.2 percent in June. Gasoline prices have been rising of late, however, reversing the trend.

The food index was unchanged, and the cost of housing rose 0.2 percent.

Wire services contributed to this article.

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