Good news on prices tamps down deflation fears

WASHINGTON -- Consumer prices held steady and big industry boosted production for the first time since February, a double dose of good news for the wobbly economy.

The flat reading in the Labor Department's Consumer Price Index for May, which came after a 0.3 percent decline in April, eased worries that the country could be headed for deflation, an economically dangerous long-term slide in prices, economists said.

The CPI report "should help alleviate some of the nagging fears of deflation," said Mark Vitner, economist at Wachovia.

Production at the nation's factories, mines and utilities nudged up by 0.1 percent last month after dropping by a sharp 0.6 percent in both March and April, the Federal Reserve said in a report that economists viewed as a sign the nation's battered industrial sector could be turning a corner.

Also, the Commerce Department reported that housing construction bounced back in May despite rainy weather in some parts of the country, escalating 6.1 percent to an annual rate of 1.73 million. That performance came after a 6.3 percent decline in April.

The latest batch of economic reports Tuesday raised hopes that the lumbering economy would pick up its pace in the second half of this year.

At the White House, presidential spokesman Ari Fleischer said the CPI report suggested that deflation is "not a serious worry."

Still, many economists believe the Federal Reserve will cut short-term interest rates, now at a 41-year low of 1.25 percent, by at least a quarter of a percentage point at its meeting next Tuesday and Wednesday.

The thinking is that the Fed wants to energize the economy and help ward off even the threat of deflation.

Although Fed policy-makers say the chance of deflation is remote, the central bank still must be alert because of deflation's potential to wreck the economy, economists said.

The United States' last serious deflation occurred during the Great Depression. A bad case of deflation can lead not only to widespread price declines -- from goods and services to real-estate and stocks -- but also to job losses and pay cuts.

Arguing against impending deflation is that the core rate of inflation, which excludes volatile energy and food prices, rose by 0.3 percent in May, the largest increase since August, after holding steady in April. A record 4.1 percent increase in lodging prices helped push up the core inflation rate last month.

On Wall Street, stocks posted small gains. The Dow Jones industrials closed up 4.06 points at 9,323.02.

White House spokesman Fleischer said Bush was encouraged by the stock market's rally since March and private economists' forecasts that show greater economic growth in the second half of the year.

For consumers, falling prices for things they buy can be a good thing. But for a producer, falling prices for what he sells means more of a squeeze on profit margins.

Wholesale prices, for instance, posted a record drop in April and fell again in May.

Faced with lackluster customer demand, some businesses are keeping a lid on price increases and sometimes even cutting prices to lure shoppers. Computer prices fell 3.7 percent last month, clothing prices declined 0.3 percent and new automobile prices dipped 0.1 percent.

Energy prices, which had been stoked in recent months on war tensions, retreated for the second month in a row in May, dropping 3.1 percent. Gasoline prices fell 6.8 percent, fuel oil prices declined 6.3 percent and natural gas prices went down 1.6 percent.

Lower energy prices are good news for consumers, relieving a strain on household budgets and giving more leeway to spend elsewhere. All of that would help economic growth.

Food prices, however, rose 0.3 percent, after nudging down by 0.1 percent in April. Prices for medical care and education each increased 0.4 percent in May.

In the Fed's report, production at factories rose 0.2 percent in May, the first increase since January. At mines, output rose 0.8 percent last month, and at gas and electric utilities production fell 0.8 percent, reflecting cooler than normal weather, economists said.

The increase in factory production is "a welcome sign that clearer skies may be on the horizon for manufacturers after a rough year," said Jerry Jasinowski, president of the National Association of Manufacturers.

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On the Net

CPI: www.bls.gov/

Industrial production: www.federalreserve.gov

Housing: www.commerce.gov/