Consumer Prices Up Slightly - 0.3% January Increase Reflects Energy Cost

www.washingtonpost.com By John M. Berry Washington Post Staff Writer Saturday, February 22, 2003; Page E01

Consumer prices rose 0.3 percent last month, led by the higher costs of gasoline and home heating oil, but the average price of other goods and services that U.S. households buy increased only 0.1 percent, the Labor Department reported yesterday.

Analysts said petroleum-based energy costs probably will continue to rise until the U.S. dispute with Iraq is resolved. But they predicted that those increases would not trigger a broad increase in inflation, particularly with the economy still not recovered from the 2001 recession.

A number of the analysts expressed more concern that the need to pay more to travel by car and to heat homes might cause people to cut back on other purchases, keeping economic growth low.

"Experience tells us that oil-price spikes like this are usually soon reversed, and so we should view them as transitory rather than a permanent feature of the inflation statistics," said economist Stephen G. Cecchetti of Ohio State University. "That means that it is extremely important to look at so-called core measures designed to smooth over these 'noisy' episodes.

"Here the picture is much as it has been for some time. The consumer price index excluding food and energy -- the traditional core measure -- . . . is up 1.9 percent for the past 12 months," Cecchetti said. "My reading is that inflation continues its modest retreat."

Inflation was 2.4 percent last year and has not been higher than 3.4 percent since 1990.

Peter Hooper, chief economist at Deutsche Bank in New York, took the same tack.

"Oil prices are up more than $10 per barrel since early December reflecting war worries, cold weather and Venezuela's [political] problems. But the core CPI inflation remains comfortably near 2 percent, and the Federal Reserve is not likely to be concerned about either inflation or deflation at this juncture," Hooper said.

Many Fed officials, including Chairman Alan Greenspan, have said they are determined to prevent either inflation or deflation. During deflation, the general level of prices falls, such as has been happening in Japan in recent years. Borrowers find it harder to repay debts and employers may find it hard to control labor costs even if they do not grant pay increases.

In the past, Fed officials have often drawn a distinction between temporary bursts of inflation because of specific conditions that are likely to be temporary -- such as an oil price spike -- and more fundamental increases in inflationary pressures. That might include a period in which employers' costs for wages and benefits rise well above offsetting gains in productivity.

With unemployment close to 6 percent in recent months, increases in average hourly earnings have been smaller. Last month, average hourly earnings were unchanged from December and up 2.7 percent from January 2002. Over the previous 12 months they had increased 3.8 percent.

In yesterday's consumer price report, Labor said food and beverage prices fell 0.2 percent and apparel prices declined 0.9 percent. It was fifth consecutive monthly drop in the price of clothing.

Gasoline prices were up 6.6 percent after two months of small declines. Home heating-oil prices rose 8.6 percent.

The cost of shelter, which includes rents and the cost of home operations, rose 0.3 percent. Education and communication costs increased 0.5 percent, partly because of a 2 percent increase in prices for college textbooks. After many months of much larger increases, medical care costs increased only 0.1 percent last month.

Over the past 12 months, the CPI rose 2.6 percent, but over the November-January period it increased at a 2.2 percent annual rate. In November through January, the core CPI rose at a 1.5 percent annual rate.