Experts - Inflation under control going into 2004

WASHINGTON -- Inflation was firmly under control as the new year began. Consumer prices rose by just 1.9 percent in 2003, while the underlying rate of inflation, which excludes food and energy prices, registered its smallest increase in 43 years. Federal Reserve chairman Alan Greenspan and other economists have said inflation is not now a threat to the economy. Their view was bolstered with Thursday's release by the Labor Department of the latest reading on the Consumer Price Index, the government's most closely watched inflation gauge.

The 1.9 percent increase in the index for all of 2003 was the smallest since 2001 and compares with 2.4 percent in 2002.

Cheaper computers, cars and clothes helped to blunt more expensive medical care, college tuition, beef and energy products.

"If you are buying clothes and vehicles and going to movies, all is right with the world. If you are eating, paying medical bills ... and sending a child to college, you are stressed," said Joel Naroff, president of Naroff Economic Advisors. "As the saying goes, where you stand on inflation depends upon where you sit."

Excluding food and energy prices, which tend to be volatile, core consumer prices rose by just 1.1 percent last year, the smallest increase since 1960. In 2002, core prices posted a 1.9 percent increase.

That is good news for consumers, generally speaking. A long bout of lackluster economic activity, which began to turn around in the second half of last year, made it difficult for many companies to raise prices and led to some price cuts to cut them to encourage more sales.

In other economic reports, sales at retailers rose by a solid 0.5 percent in December, the Commerce Department said. That followed a 1.2 percent increase in November, which was stronger than previously estimated.

New claims for unemployment benefits dipped by a seasonally adjusted 11,000 last week to 343,000, the Labor Department said. This report suggested companies are feeling more confident the recovery is real and thus are slowing the speed at which they lay off workers.

The four-week moving average of claims, which smooths out weekly fluctuations, dropped last week to 347,500, the lowest level in nearly three years.

On Wall Street, the Dow Jones industrials gained 15.48 points to close at 10,553.85.

Greenspan this week said inflation has remained benign even as the economy has grown stronger and the dollar has fallen by roughly 25 percent against major foreign currencies since early 2002.

In December, consumer prices rose by 0.2 percent. Core prices nudged up 0.1 percent.

With inflation under control and the fragile labor market still struggling to get back to full health, Fed policy-makers have leeway to hold their main short-term interest rate at 1 percent, a 45-year low, at their next meeting on Jan. 27-28, economists said.

"With the December CPI report showing inflation entirely benign, the Fed can stay on hold indefinitely," said Bill Cheney, chief economist at John Hancock.

Some economists believe the Fed will keep rates near rock-bottom levels through the rest of the year and into 2005. Others believe there is a chance the Fed could begin to raise rates this year, depending on how the economy is doing.

In 2003, computer prices plunged 17.8 percent as the hard-hit high-tech sector tries to get back on its feet. Clothing prices dropped 2.1 percent, reflecting discounting by merchants to lure shoppers. New automobile prices fell 1.8 percent as companies offered discounts and incentives to gin up sales. Airline fares dipped by 0.1 percent.

Those and other price declines helped to temper rising costs elsewhere.

Medical care costs rose 3.7 percent and prices for college tuition and fees went up 9.8 percent in 2003, the largest increase since 1992.

All energy prices increased 6.9 percent for all of last year. Natural gas prices jumped 17.4 percent, the largest increase since 2000. Gasoline costs were up 6.8 percent.

Food prices rose 3.6 percent last year. Beef and veal prices were up by 23.5 percent, the largest increase since 1978.

From an economic point of view, the overall picture painted by the CPI report suggests "we have arrived at price stability" and that "inflation is not an immediate problem," said Stephen Cecchetti, economics professor at Brandeis University.

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On the Net:

CPI: http://www.bls.gov/