Features

Economists encouraged by falling consumer prices

The Associated Press
Friday August 17, 2001

WASHINGTON — A sharp drop in the cost of gasoline and other energy products helped drive down consumer prices in July by the largest amount in 15 years. 

There also was good news on two other fronts Thursday: Housing construction posted its best performance in 17 months and the number of workers filing jobless benefits declined, suggesting better days ahead for the slumping economy. 

“This is all great economic news,” said Mark Zandi, chief economist for Economy.com. “After all the gloom, which was getting thicker and thicker, there is a little break in the clouds and sunlight is poking through.” 

Even so, stock indexes were down slightly by midafternoon as investors focused more on companies’ profit and revenue warnings than on the broader economy. 

While Federal Reserve Chairman Alan Greenspan and his colleagues have plenty of room to cut interest rates further, given the tame inflation, economists are predicting that policy-makers will opt for a quarter-point reduction rather than a more aggressive half-point when they meet Tuesday. 

“I think it’s close to a slam dunk for a quarter-point cut,” said Tim O’Neill, chief economist for Bank of Montreal and Harris Bank. “The Fed doesn’t have the inflation monkey on its back. Housing is still amazing. Jobless claims are encouraging and manufacturing, which has been the weakest part of the economy, may be bottoming out.” 

To avert a recession, the Fed has cut interest rates six times this year, totaling 2.75 percentage points. One of the reasons the central bank has been able to act so aggressively is that inflation has been contained. 

So far this year, consumer prices have increased at an annual rate of 2.8 percent, compared with an increase of 3.4 percent for all of 2000. 

After edging up by 0.2 percent in June, the government’s most closely watched inflation gauge actually fell by 0.3 percent in July. It was the first drop this year in the Labor Department’s Consumer Price Index and the best showing on inflation since a 0.4 percent decline in  

April 1986.  

The “core” rate of inflation, which excludes volatile energy and food prices, moderated in July, rising by 0.2 percent, compared with a gain of 0.3 percent in June. 

A second report showed that the housing market continues to thrive. 

Housing construction rose by 2.8 percent in July to an annual rate of 1.67 million, the best performance since February 2000, the Commerce Department said. 

 

“We’re cruising along,” said David Seiders, chief economist for the National Association of Home Builders. Low interest rates and the fact that most Americans still have jobs have kept activity solid. 

A third report suggested that layoffs may be slowing. New claims for state unemployment insurance fell by a seasonally adjusted 8,000 to 380,000 last week. The more stable four-week moving average of claims also fell to 370,750, the lowest since early March. 

In the months ahead, economists believe inflation will remain well-behaved. Soaring energy prices, which caused consumer inflation to jump by 0.6 percent in January, have eased. Also, the slowdown has made it harder for companies to raise prices and many businesses are reluctant to make big increases in workers’ pay and benefits. 

A 5.6 percent plunge in energy prices accounted for much of the good inflation news for July. 

Gasoline prices fell by 11 percent in July. Nationwide average prices at the pump have tumbled since peaking May 18 at $1.76 a gallon. 

Natural gas prices, which posted a record decline in June, fell by 4.1 percent in July. Home-heating oil went down by 2.8 percent. 

After soaring by a record 3.8 percent in June, electricity prices eased in July, rising 0.6 percent. That probably is little comfort to California residents coping with a power crisis caused by shortage of electrical generating capacity. 

Clothing prices fell 0.6 percent and airline fares were down 0.2 percent. 

All these lower prices swamped higher prices for other goods. Food prices rose 0.3 percent in July. Prescription drug costs rose 0.6 percent and tobacco costs shot up 4.8 percent, the largest increase since September 1999. 

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On the Net: 

CPI:http://www.bls.gov/ 

Jobless:http://www.ows.doleta.gov/news/news.asp 

Housing starts: http://www.census.gov/indicator/www/housing.html