Consumer costs flat for May

Jeannine Aversa

Tuesday, June 17, 2003 | 9:49 a.m.

WASHINGTON -- Consumer prices were flat in May as falling costs for energy products and clothing offset rising prices for medical care and lodging. Industrial production, meanwhile, posted its first increase since February.

The latest snapshot of the Consumer Price Index, the government's most closely watched inflation gauge, showed a pickup in consumer prices from April's 0.3 percent decline, the Labor Department reported today.

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."

In a second report, the Federal Reserve said that production at the nation's factories, mines and utilities nudged up by 0.1 percent in May, after dropping by a sharp 0.6 percent in both March and April, a sign that the nation's battered manufacturing sector is turning a corner. May's increase in industrial output was the first since February, when production also edged up by 0.1 percent.

The CPI report suggested that the threat of an economically dangerous long-term slide in prices doesn't appear to be affecting many consumer prices, especially for services.

In another report, the Commerce Department said housing construction jumped by 6.1 percent in May from the previous month to a seasonally adjusted annual rate of 1.73 million new units, good news from one of the economy's few sources of power.

In the CPI report, the "core" rate of inflation, which excludes energy and food prices which tend to swing widely from month to month, rose by 0.3 percent in May- the largest increase since August -- after holding steady in April.

The flat reading on consumer prices surprised economists, who were predicting the CPI would dip by 0.1 percent in May. The increase in the core inflation rate also was larger than the 0.1 percent increase that economists had forecast.

Many economist 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 next meeting June 24-25 in a bid to energize the economy and help ward off even the threat of a deflation outbreak.

Although Fed policy-makers say the chance of that happening is remote, the Fed still must be alert for deflation because of its potential to wreck the economy, they said. The United States' last serious case of deflation was during the Great Depression.

More normal and contained cases of falling prices, however, can benefit consumers. But for a producer, falling prices for something he sells means more of a 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 price increases and in some cases are cutting prices to lure shoppers.

Fleischer, the White House spokesman, suggested that fears of deflation were overblown.

And while economic indicators still "remain mixed," Fleischer said that Bush was encouraged by the powerful stock market rally since March and private forecasts showing economic greater growth in the second half of the year.

In May, consumer prices for apparel fell by 0.3 percent and new automobile prices dipped by 0.1 percent.

Energy prices, which had been stoked in recent months on war tensions, retreated for the second month in a row in May, dropping by 3.1 percent. Lower energy prices are good news for consumers, relieving a strain on household budget and giving them more leeway to spend elsewhere.

Gasoline prices fell by 6.8 percent in May, fuel oil prices dropped by 6.3 percent and natural gas prices went down 1.6 percent.

Food prices, meanwhile, rose 0.3 percent, after nudging down by 0.1 percent in April. Rising prices for fruits, vegetables and pork swamped falling prices for beef and veal, poultry and dairy products in May.

Medical care prices increased by 0.4 percent in May, continuing to pinch the wallets and pocketbooks of consumers. Prices for lodging shot up 4.1 percent in May, the largest increase on record.