Originally created 06/18/97

Low inflation, healthy growth equal good economy



WASHINGTON (AP) - The sharpest decline in gasoline prices in six years helped keep inflation dormant in May. Consumer prices inched up a barely noticeable 0.1 percent.

Separate reports on industrial production and housing construction Tuesday showed economic growth slowing from the breakneck pace of earlier this year to a sustainable but still healthy rate.

Wall Street appeared to approve of the combination, briefly pushing the Dow Jones average of industrial stocks above 7,800 before it eased back for a small loss.

"It's a picture-perfect economy," said economist Allen Sinai of Primark Decision Economics in New York. "Good growth, but much slower than the first quarter, with inflation totally under control."

The tiny rise in the Labor Department's Consumer Price Index was the third consecutive increase of that amount. It brought the seasonally adjusted and annualized inflation rate for the year to just 1.4 percent. That's less than half the 3.3 percent price gain for all of last year.

Excluding the volatile food and energy sectors, prices rose a modest 0.2 percent last month. These so-called core prices, considered a better gauge of underlying trends, have risen at a 2.6 percent annual rate through May, the same as the increase for all of last year. It's the lowest sustained rate since the mid-1960s.

"Inflation has disappeared and is nowhere to be found," said economist Sung Won Sohn of Norwest Corp. in Minneapolis. "We are really in uncharted territory with the inflation rate this low for an extended period."

Few economists had predicted inflation would remain so tame after the economic growth rate surged to a 10-year high in the first quarter. But other reports leave them confident growth is subsiding to a level unlikely to greatly aggravate inflation.

Construction starts of new homes and apartments fell 4.8 percent in May to a seasonally adjusted annual rate of 1.4 million after drops in April and March, the Commerce Department said. It was the first string of three consecutive declines in more than two years.

Meanwhile, the settlement of an auto worker strike against Chrysler Corp. in early May contributed to a moderate 0.4 percent increase in output at the nation's factories, mine and utilities, the Federal Reserve said.

The increase raised the industrial operating rate to 83.7 percent of capacity, highest since September 1995.

That's a hint of possible future inflation problems and the report initially disturbed the stock market. But by noon the Dow average had advanced into record territory before pulling back to close down 11.31 points at 7,760.78.

Economists said the consumer price report reinforced their belief that central bank policy-makers will vote to hold interest rates steady when they meet in two weeks.

"Today's numbers sideline the Fed for the summer," economist Tim O'Neill of Harris Bank/Bank of Montreal wrote in a commentary.

That would be a welcome development for debt-burdened Americans, whose position improved only marginally in the first quarter. The percentage of credit-card holders 30 or more days behind on their bills declined to a seasonally adjusted 3.51, down from a record 3.72 in the fourth quarter.

Despite consumers' credit problems, the nation's 9,451 commercial banks earned a record profit of $14.5 billion in the first quarter, the Federal Deposit Insurance Corp. said. The gain was supported by growing fee income. The country's 1,886 savings institutions earned $2.4 billion.

In May, a 2.4 percent drop in energy prices - the third in a row and the largest in six years - helped offset a 0.4 percent rise in food costs.

Fuel oil, electricity, natural gas and gasoline all fell, with gasoline plunging 4.6 percent on a seasonally adjusted basis. Actual gasoline prices fell 0.2 percent. Normally they'd be climbing with the advent of the summer driving season.

Coffee prices jumped 2.8 percent in May. They've risen 14.1 percent in the past three months as supplies of high-quality beans from Colombia and Brazil dwindled. Drops in pork and fruit prices helped offset increases in beef, poultry and fresh vegetables.

Airline fares fell 1.3 percent and tobacco, 0.5 percent. New car and truck prices and auto finance charges declined too. Medical care costs rose 0.3 percent. For the year so far, they're climbing at a 3 percent annual rate.