Food Prices Rise, but Inflation 'Tame'
If you grew all of your own food and didn't drive a car last year, you wouldn't have noticed prices going up. But if you shop for food and fuel, yesterday's annual report on US price hikes isn't likely to be a surprise.
The consumer price index (CPI) rose by 3.3 percent for all of 1996 - the biggest jump in the inflation rate since 1990. But most economists still consider inflation to be under control. For the month of December, the CPI was up a modest 0.3 percent overall.
Despite the price gains, most economists say the so-called "core rate" of inflation remains tamed. They don't believe the current numbers will spur the Federal Reserve to raise interest rates at its next Open Market meeting on Feb. 4 and 5. "The numbers suggest the Fed has no imminent need to tighten policy," says Robert Dederick, an economist with the Northern Trust Company in Chicago.
Next month, Alan Greenspan, the chairman of the Federal Reserve, will testify before Congress. He is likely to issue a stern warning about the dangers of inflation, but is not expected to raise interest rates until the spring.
The chief culprit behind the higher CPI number was energy prices, which rose 8.6 percent last year. Gasoline prices were up 12.4 percent, the biggest jump since a 36.8 percent increase in pump prices in 1990. Prices spiked last month as arctic weather pushed home-heating oil and natural-gas prices sharply higher.
Economists expect oil prices will start to stabilize as Iraq begins to pump about 500,000 barrels of oil per day to help it pay for humanitarian relief. In two months, the weather should start to moderate, relieving some pressure on prices. A cold winter in Europe has also kept demand for fuel high.
Food prices rose 4.3 percent last year - the biggest jump since 1990 - led by rising prices for dairy products, pork, poultry, and fruit. But David Wyss, an economist with DRI-McGraw Hill INc., says food prices are starting to show some signs of coming down. "Once we get the next harvest we should see some relief," he says. But food prices may not come down very much. Wet weather in California and cold temperatures in Texas have hurt the winter vegetable and fruit crops. "It will hurt us in January and February," predicts Wyss.
Despite the higher food and energy prices, there was some good news last year. The prices of new cars rose a modest 1.6 percent. Medical expenses, which had been rising at a 9 percent rate in the early 1990s, climbed by only 3 percent. Housing and entertainment rose by about 3 percent year over year. And, for those in need of new togs, there were some real bargains around - prices actually declined by 0.2 percent.