In Spite of Fuel Hikes, Reports Show Inflation Under Control

WASHINGTON —  Despite the biggest one-month jump in gasoline prices since the Persian Gulf crisis nearly six years ago, the underlying rate of consumer inflation was well behaved in April, while retail sales fell, according to the latest government data released Tuesday.

Financial markets rallied on the economic reports, believing they have ended any possibility of an interest rate increase when the Federal Reserve Board meets next week.

The Dow Jones industrial average closed up 42.11 points while the yield on the Treasury’s benchmark 30-year bond, which only last week climbed above 7% for the first time in a year because of inflation worries, declined to 6.84%. The Labor Department said that consumer prices were up 0.4% in April, with three-fifths of the gain blamed on surging energy prices.

Meanwhile, the Commerce Department reported that retail sales fell by 0.3% in May, the first decline since a 0.2% setback last October.

“Inflation fears have been grossly exaggerated,” said Cheryl Katz, senior economist at Merrill Lynch in New York.

“These two reports should reduce fears of Fed tightening and economic overheating.”

While the overall price rise in April matched the March advance, investors were reassured because the so-called core rate of consumer inflation, excluding energy and food, was up a minuscule 0.1%, the smallest gain this year.

Overall, inflation is rising at an annual rate of 4.1% through the first four months of this year, far above the 2.5% increase for all of 1995.

But analysts noted that the bulk of the deterioration has been caused by energy prices, which have been racing ahead at an annual rate of 22.5% this year.

For April, gasoline prices shot up 5.3%, the biggest one-month rise since October 1990 when Iraq’s invasion of Kuwait sent world crude oil prices soaring.

The current energy price spike has been blamed in part on the unusually cold winter, which forced refiners to draw down heavily on crude oil inventories and delayed the switch to gasoline.

Economists noted that crude oil prices have already started to retreat as supplies increase to meet demand.

Food prices climbed 0.3% in April as fruit and vegetable prices, which had jumped 4% in March, climbed another 1% in April.

The 0.1% increase in the core rate of inflation in April was just half of what analysts had been expecting. Analysts viewed this as an encouraging sign that the jump in energy prices is not spilling over into other parts of the economy.

Helping to restrain prices in April was a 0.4% decline in clothing costs, reflecting the start of discounting following the introduction of the new spring and summer lines.

Medical care costs were up 0.3% in April while airline ticket prices climbed by 0.6%.

The 0.3% decline in retail sales followed gains of 0.5% in March and 2.1% in February. Excluding a 2.5% drop in auto sales, retail spending would have been up by 0.4%.

However, analysts noted that half of that gain reflected higher gasoline prices and not increased demand for products.

“The consumer is not off to a very strong start for the second quarter,” said Marilyn Schaja, economist at Donaldson, Lufkin & Jenrette.

Many analysts predicted that not only would the Fed remain on the sidelines next week but for the rest of the year as long as the economy continues growing at a modest pace with no threat of inflation.

* MARKETS RALLY

Dow industrials rise sharply as bond yields decline on CPI report. D3

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Consumer Prices

Percentage change, month to month, seasonally adjusted:

April 1996: +0.4%

Source: Bureau of Labor Statistics