Tame Inflation Quiets Bears On Wall Street

Whew! Investors dodged another statistical bullet.

The consumer price index (CPI) showed no acceleration in inflation in March, bringing a brisk rise to stock prices as the market opened April 15.

Just maybe the Federal Reserve will not need to boost interest rates so much in the months ahead.

Consumer prices edged up a tiny 0.1 percent for March, the Bureau of Labor Statistics (BLS) reported.

That brings the annualized inflation rate this year to just 1.8 percent, far below last year's rate of 3.3 percent and a relief to investors worried about rising interest rates.

Susan Hickok, chief economist at Prudential Economics, Newark, N.J., described it as a "solid number," a number that should soothe some jitters on Wall Street.

Inflation worries have helped pull the Dow Jones industrial average down almost 10 percent from its record high in March. Investors reason that more inflation brings higher rates, and that hurts stock prices.

But "inflation is low across the board," says Ms. Hickok.

Many economists expected the CPI to rise about 0.3 percent, the same as in February.

When the BLS reported on Friday, April 11 that "core" wholesale prices, which exclude volatile energy and food prices, rose 0.4 percent in March, investors got cold feet. They pushed stock prices down sharply. The Dow tumbled 148 points that day.

But White House economist Alicia Munnell sees no need for such concern.

Core producer prices rose only 0.8 percent in the past 12 months, notes Ms. Munnell, one of three members of President Clinton's Council of Economic Advisers. That's down from a 1.9 percent increase for the same figure the year before.

The increase in the consumer price core has declined similarly, she notes.

The improvement reflects moderation in both food and energy costs. In March, the cost of gasoline, home heating oil, and natural gas declined. Food costs were unchanged.

Many economists and investors expect the Fed to raise interest rates another 0.25 percentage point when its policymakers meet May 20. The debate now centers on whether the Fed will push rates even higher.

Stephen Roach, chief economist at Morgan Stanley & Co. in New York, holds a minority view that the Fed will need to raise rates a full percentage point by the end of the year to brake the economy to a weak 1 percent real growth trajectory for at least a year.

Economist Christopher Low says the economy will slow this summer regardless of Fed action. He sees no need for further tightening but expects another hike anyway in May.

Consumer spending got a special lift in the first quarter from two factors, says Mr. Low, of HSBC Markets Inc., New York.

Many people got tax refunds early this year through electronic filing. And a lively stock market and corporate profits meant large bonuses for some.

A jump in retail sales last winter also led Wall Street to see inflation in the economy.

But consumer spending will now moderate, Low says. High mortgage rates will dampen new housing. And corporate profits will weaken.

Low predicts that the stock market is "probably close to the end of the worst."