- The Washington Times - Tuesday, June 17, 2003

ASSOCIATED PRESS

Consumer prices held steady in May and big industry boosted production for the first time since February, a double dose of good news for the wobbly economy.

The flat reading in the Labor Department’s Consumer Price Index, which came after a 0.3 percent decline in April, eased worries that the country could be headed for deflation, an economically dangerous long-term slide in prices, economists said.

The CPI report “should help alleviate some of the nagging fears of deflation,” said Mark Vitner, economist at Wachovia.

Production at the nation’s factories, mines and utilities nudged up by 0.1 percent last month after dropping a sharp 0.6 percent in both March and April, the Federal Reserve said in a report that economists viewed as a sign the nation’s battered industrial sector could be turning a corner.

Also, the Commerce Department reported that housing construction bounced back in May despite rainy weather in some parts of the country, rising 6.1 percent to an annual rate of 1.73 million. That performance followed a 6.3 percent decline in April.

Yesterday’s batch of economic reports raised hopes that the lumbering economy would pick up its pace in the second half of this year.

At the White House, presidential spokesman Ari Fleischer said the CPI report suggested that deflation is “not a serious worry” and that President Bush “is hopeful the signs of economic growth will continue to gather steam.”

Still, many economists believe the Federal Reserve will cut short-term interest rates, now at a 41-year low of 1.25 percent, by at least a quarter of a percentage point at its meeting next Tuesday and Wednesday. The thinking is that the Fed wants to energize the economy and help ward off even the threat of deflation.

Although Fed policy-makers say the chance of deflation is remote, the central bank still must be alert because of deflation’s potential to wreck the economy, economists said.

The United States’ last serious deflation occurred during the Great Depression. A bad case of deflation can lead not only to widespread price declines — from goods and services to real estate and stocks — but also to job losses and pay cuts.

Arguing against impending deflation is that the core rate of inflation, which excludes volatile energy and food prices, rose by 0.3 percent in May, the largest increase since August, after holding steady in April. A record 4.1 percent increase in lodging prices helped push up the core inflation rate last month.

Amid mixed economic indicators, Mr. Fleischer said Mr. Bush was encouraged by the stock market’s rally since March and private forecasts that show greater economic growth in the second half of the year.

For consumers, falling prices can be a good thing. But for a producer, falling prices for what he sells means more squeeze on profit margins.

Wholesale prices, for instance, posted a record drop in April and fell again in May.

Faced with lackluster customer demand, some businesses are keeping a lid on prices and sometimes cutting them to lure shoppers. Computer prices fell 3.7 percent last month, clothing prices declined 0.3 percent and new-automobile prices dipped 0.1 percent.

Energy prices retreated for the second straight month in May, dropping 3.1 percent. Gasoline prices fell 6.8 percent, fuel-oil prices declined 6.3 percent and natural gas prices went down 1.6 percent.

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