Inflation rate in 1998 slowest since 1986; Consumer spending busiest since 1984


WASHINGTON -- U.S. consumer prices rose in 1998 at their slowest pace in 12 years and retail sales surged in December, capping a year in which rising wages allowed consumer spending to increase at its fastest pace since 1984 and energized the economy's longest peacetime expansion.

The consumer price index rose 1.6 percent last year, less than 1997's 1.7 percent increase and the lowest annual inflation rate since 1986, the Labor Department reported yesterday. In December, prices rose only 0.1 percent as declines in gasoline and home heating oil prices offset higher cigarette prices.

Retail sales rose 5.1 percent in 1998, topping the 4.3 percent increase a year earlier, the Commerce Department said. Near-record sales at Ford Motor Co., DaimlerChrysler A. G. and other automakers and double-digit sales increases at furniture and home improvement stores such as Home Depot Inc. and Lowes Companies Inc. pushed December sales 0.9 percent higher.

"We have seldom experienced what we have now -- low unemployment, low interest rates and low inflation," said Gary Thayer, an economist at A. G. Edwards & Sons Inc. in St. Louis. "Consumers were out there taking advantage of it."

Last year and 1997 marked the first time since 1965 that inflation was below 2 percent for two years in a row. And it wasn't just cheap goods. The cost of services, which account for about 57 percent of all consumer spending, rose 0.2 percent in December and 2.6 percent for the year, down from 2.8 percent in 1997.

Automakers reported unit sales of autos and trucks rose 7 percent in December. That translated into a 2.5 percent increase in sales at automotive dealers, which also include spending on auto repairs and parts. If autos were excluded, December sales rose 0.4 percent, the Commerce Department figures showed.

The nation's strong housing market also played a role in last month's retail strength. Sales at building materials stores rose 1.3 percent, while furniture and household store sales increased 0.6 percent.

In contrast, sales fell 0.2 percent at general merchandise stores and fell 0.6 percent at apparel stores. Analysts blamed warm weather at the beginning of December, which held down sales of winter merchandise and led retailers to cut prices.

The CPI report showed the cost of apparel and upkeep fell 0.8 percent in December, the biggest drop since August of 1989. That depressed retail apparel sales, which are reported in dollars. "It's more a price than sales problem," said David Orr, chief economist at First Union Corp. in Charlotte, N.C.

Sales of computers and other electronics rose as retailers such as Best Buy Co. and Circuit City Stores Inc. reported double-digit sales increases in December. The retail figures suggest that the nation's gross domestic product expanded at a 4 percent or better pace in the fourth quarter of 1998 as consumer spending rose at an annual rate between 5.0 percent and 5.5 percent, analysts said.

That should push GDP growth for all of 1998 close to 4 percent, the third consecutive year of growth above 3 percent.

Pub Date: 1/15/99

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