Prices Up 0.5% as Inflation Hits 6.1% in Quarter

WASHINGTON —  Consumer prices continued their relentless upward march last month, rising 0.5% and pushing inflation for the first three months of the year to an annual rate of 6.1%, the highest quarterly rate in two years, the Labor Department said Tuesday.

The news was widely expected in financial markets, however. Traders who had been spooked by bad inflation reports earlier in the year focused instead on news of a steep monthly decline in new housing starts, one of several recent welcome signs that the economy is cooling.

That prospect sent interest rates tumbling and stock prices soaring. The Dow Jones industrial average gained 41.61 points to 2379.40. (Details in Business, Page 1.)

Economists Not Optimistic

However, economists were far less sanguine than traders.

“It’s funny how the world changes,” said Donald Ratajczak of the economic forecasting project at Georgia State University. “Now people are acting enthusiastic about inflation of ‘only’ 6% this quarter. But I think people are misreading it. The worst of inflation is not behind us. It is probably in front of us.”

Ratajczak and other specialists pointed out that, even without the volatile elements of food and energy prices, which together have been accelerating inflation this year, prices moved upward by 0.4% in March. That is notably higher than the average over the last several years, and it translates into an annual rate of just over 5%.

“It’s worse than it looks,” said Giulio Martini of Sanford Bernstein & Co., a New York investment firm. “If you look at the longer-term averages, you see a 6.1% annual rate last quarter, compared to 5% over the past 12 months, compared to 4.4% during all of 1988.”

Excluding energy, the most changeable component of the price index, inflation in the first three months of 1989 ran at an annual rate of 5.9%, compared with 4.7% last year, 4.1% in 1987 and 3.8% in 1986. “That means the basic, core rate of inflation is now unmistakably getting worse, month by month,” Martini said.

Drought Affecting Prices

The lingering effects of last year’s drought on food prices and the continuing pass-through of higher crude oil prices caused by cohesiveness of the petroleum exporting countries pushed food prices up 0.7% in March and energy up 1.1%. Food prices have been rising at an 8.1% annual rate so far this year, and energy at a 10.2% rate.

But Tuesday’s report of a sharp 5.4% drop in housing starts last month, paced by a staggering 34.1% decline in the pricey Northeast market and underlined by a 13.7% decline in building permits nationwide, distracted attention away from inflation and toward prospects of an economic slowdown.

Coupled with reports last week suggesting stalled factory production, sluggish retail sales and a slight deline in factory use, the report on housing starts hardened a consensus that the economy will slow markedly in the April-June and July-September quarters.

“There is still a lot of inflationary pressure in the economy, but I think we’ll see it peak in the next few months,” said Cynthia Latta of Data Resources Inc., a forecasting firm in Lexington, Mass.

“Gasoline is still rising sharply, so we may be in for a few more months of bad numbers,” she said. “But the Fed has been cracking down on interest and money supply, and it’s hard to feed inflation indefinitely without money growth.”

The outlook, according to Data Resources’ computers: Reduced consumer demand this summer should begin to chill inflation before it gets out of control.

Before seasonal adjustment, consumer prices in the Los Angeles-Anaheim-Long Beach metropolitan area advanced 0.6%, the same as the unadjusted March inflation increase for urban consumers nationwide. Over the last 12 months, prices in greater Los Angeles have increased 4.6%, compared to 5% nationwide.

The March inflation report raised the consumer price index by 0.7 of a point, before seasonal adjustment, to 122.3, compared with 100 during the 1982-1984 base period. That means a hypothetical cross section of consumer goods and services costing $100 during the base period would have cost $122.30 in March, 70 cents more than in February.