Inflation outlook remains rosy as June CPI edges up 0.2 percent

By , Staff writer of The Christian Science Monitor

Consumer prices are behaving well this year, and most experts say the good inflation performance will continue through 1986. Prices at the consumer level rose 0.2 percent in June after adjustment for seasonal factors, the government said.

The consumer price index (CPI) has risen at a 3.7 percent annual rate in the first six months of 1985 vs. a 4.0 percent rate for all of 1984.

Any potential storm clouds signaling renewed inflation are barely visible on the economic horizon, analysts say.

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``We are not expecting any explosion in inflation at all,'' says Lea Tyler, an economist at Chase Econometrics.

``There aren't any real concerns'' about inflation at the moment, adds John Hammond, director of consumer economics at Data Resources Inc.

The consensus forecast of 50 top economists surveyed by the newsletter ``Blue Chip Economic Indicators'' shows consumer prices rising 3.8 percent this year. That would be the fourth consecutive year with an inflation rate of 4 percent or less. By contrast, in 1980 prices soared 12.4 percent and went on to surge 8.9 percent in 1981.

The good inflation news is expected to continue into 1986, forecasters surveyed by the Sedona, Ariz., newsletter say. They expect consumer prices to climb 4.3 percent next year.

There are a variety of reasons for the recent good inflation performance, analysts say.

Slower economic growth, accompanied by spare factory capacity and relatively high unemployment, has helped keep the lid on wages and prices, economists say. Falling energy prices as well as industry deregulation and its accompanying labor-market upheaval also have helped.

One of the biggest factors in taming inflation is the surge of imports into the US. The flood of foreign products has kept downward pressure on agricultural and industrial prices.

``Sensitive agricultural and industrial prices -- including prices of crude petroleum -- have been declining appreciably, and prices at the wholesale level have been almost flat,'' Federal Reserve Board Chairman Paul A. Volcker noted last week.

Prices have been rising more rapidly in the service sector of the economy, which faces less import competition. Prices of services, except energy, have risen 5.6 percent since June 1984, the latest CPI figures show.

Roughly two-thirds of the increase in consumer prices in the last six months was accounted for by housing and transportation costs, the government says. Falling mortgage interest rates have given ``home prices an upward boost,'' Mr. Hammond notes.

Ironically, gasoline prices rose sharply in March and April -- and have moved upward at a slower rate since then -- despite an oil glut and falling world oil prices. In June, gasoline prices rose 0.2 percent after seasonal adjustment.

Also oil companies held gasoline stocks down this spring to avoid a recurrence of the oversupply they faced coming out of the winter of 1984, Hammond says.

The outlook is for gasoline prices to level off or ``drift downward with oil prices over the long term,'' Chase economist Tyler says.

There are potential clouds on the horizon. A sharp drop in the value of the dollar in foreign-exchange trading ``poses the greatest potential threat to the progress we have made against inflation,'' Mr. Volcker says.

If the dollar dropped sharply, foreign manufacturers normally would be expected to boost the price of their goods sold in the US. Those higher prices could in turn boost the inflation rate. And with imported goods costing more, US manufacturers would have greater freedom to raise their prices.

But some economists argue that even if the dollar's value falls, foreign manufacturers are not about to sacrifice the increased US market share they've captured on the altar of higher prices.

``We expect foreign manufacturers to narrow their profit margins in lieu of raising prices,'' says Deborah Johnson, an assistant vice-president at Prudential Bache Securities.

Other analysts say recent large increases in the US money supply could lead to inflation down the road if the speed with which money changes hands were to increase.

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