Prices Stay Flat, Reassuring Inflation Hawks

PRESIDENT Clinton will have something to smile about when he returns to the White House from touring the flood-ravaged Midwest: The latest economic news shows the cost of living staying stable while consumers show some signs of opening their wallets.

The government reported yesterday that the Consumer Price Index (CPI) was unchanged for June while retail sales rose by 0.4 percent. "It's the best of both worlds," says Robert Dederick, chief economist for Northern Trust Company in Chicago.

The CPI numbers were level in large part because of a confluence of favorable factors. Fruit and vegetable prices, which had soared in the spring, fell back to seasonal levels. Tobacco prices tumbled as the cigarette companies engaged in a price war. And gasoline prices dropped as oil-producing nations ignored their cartel-set quotas and produced more oil than the world could consume.

A stable CPI is good news for the economy: "Anyone getting an increase in their salary can buy more," says Donald Ratajczak, chief economist at the Georgia State University Economic Forecasting Unit.

Mr. Ratajczak says the economic news should be a boost for the president. "The worst fear of any sitting president is stagflation - no economic growth and higher prices. This is the reverse. Prices are stable and people are putting more money in their pockets," he says. Economists say the country's core inflation rate is about 3 percent. At this level, Mr. Dederick says, "the Federal Reserve Board can relax - inflation is not a problem."

The flat CPI numbers were foreshadowed Tuesday when the government said the Producer Price Index (PPI) for June had declined 0.3 percent, more than originally forecast by some Wall Street firms. Excluding food and energy, the core PPI edged down 0.1 percent. Food prices were down 0.6 percent and energy prices fell 0.5 percent.

Despite the good news on inflation, it is still too early to tell the impact of the Midwest floods on future farm prices. The Agriculture Department has dropped its estimate of the corn harvest by 7.6 percent and of soybean production by 3.4 percent. However, the United States appears to be headed toward a bumper wheat crop. The commodity futures analysts at Merrill Lynch & Co. say that the grain prices have seen their highs for the year, resulting in a "minimal" impact on overall inflation.

At the same time, many of the major inflation determinants are quiet. Oil prices have slipped in anticipation that Iraq will be allowed to sell oil. The Journal of Commerce Industrial price index is at its lowest point in 18 months. And, notes Donald Straszheim, chief economist at Merrill Lynch, "labor costs show no sign of accelerating."

Retail sales in June indicated that consumers had a slightly increased interest in shopping. The numbers were bolstered by healthy car sales.

Economists have only modest expectations for growth this year. Gail Fosler, an economist at the Conference Board, a business membership organization in New York, predicts 1993 economic growth of 2.4 percent, only slightly better than last year. Reflecting the slow growth, a recent Conference Board survey of 650 corporations found that only 22 percent intended to increase their hiring. This is the same level of hiring expected during the 1981-82 recession.

The consumer price report confirms that an inflation blip this spring was an aberration caused by weather distortions. Those higher inflation numbers helped drive up the price of gold and caused some raised eyebrows at the Federal Reserve Board. In May, the Fed's Open Market Committee committed itself to slightly higher short-term interest rates.

The current numbers may help alleviate Fed concerns. "Fed policy will be on hold in the near future," predicts Kevin Flanagan, at Dean Witter Reynolds Inc.

In fact, some economists say long-term interest rates may actually decline more in the near future if Mr. Clinton's budget bill passes Congress close to its current form. Brian Fabbri, chief international economist at Midland Global Markets, projects the 30-year Treasury bill could dip down to a 6.375 percent yield. As of Tuesday, the 30-year Treasury bond was yielding 6.61 percent, its lowest yield in 16 years.

Although Wall Street remains cynical about congressional deficit reduction packages, economist Brian Keyser of NationsBank notes that the trend is going in the right direction. "We may be skeptical about the details, but deficit reduction is better than deficit increases," he says.