Despite the biggest one-month jump in gasoline prices since the Persian Gulf crisis nearly six years ago, the underlying rate of consumer inflation was well-behaved in April, while retail sales fell.
Financial markets rallied on the new economic reports Tuesday, believing they have ended any possibility of an interest rate increase when the Federal Reserve meets next week.
The Labor Department said the Consumer Price Index was up 0.4 percent in April with three-fifths of the gain blamed on surging energy prices.
Meanwhile, the Commerce Department reported that retail sales fell by 0.3 percent in May, the first decline since a 0.2 percent setback last October.
“Inflation fears have been grossly exaggerated,” said Cheryl Katz, senior economist at Merrill Lynch in New York. “These two reports should reduce fears of Fed tightening and economic overheating.”
Wall Street agreed as the Dow Jones industrial average shot up 42.11 points to close at 5,624.71.
Treasury’s benchmark 30-year bond, which only last week climbed above 7 percent for the first time in a year because of inflation worries, fell below 6.85 percent Tuesday as strong demand for bonds pushed their yields lower.
“The inflation scare has largely passed,” said Mark Vitner, senior economist at First Union Capital Markets in Charlotte, N.C. “There was a lot more concern about inflation than was warranted.”
While the overall price rise of 0.4 percent in April matched the March advance, investors were reassured because the so-called core rate of consumer inflation, excluding energy and food, was up a minuscule 0.1 percent, the smallest gain this year.
Overall inflation is rising at an annual rate of 4.1 percent through the first four months of this year, far above the 2.5 percent increase for all of 1995.
But analysts noted that the bulk of the deterioration has been caused by energy prices, which have been racing ahead at an annual rate of 22.5 percent this year.
For April, gasoline prices shot up 5.3 percent, the biggest one-month rise since October 1990 when Iraq’s invasion of Kuwait sent world crude oil prices soaring.
The current energy price spike has been blamed on the unusually cold winter, which forced refiners to draw down heavily on crude oil inventories and delayed the switchover to gasoline.
Economists noted that crude oil prices have already started to retreat as supplies increase to meet demand. A survey of gasoline stations last week showed that the rise in pump prices had slowed to less than half the rates reported in March and April.
Food prices climbed 0.3 percent in April as fruit and vegetable prices, which had jumped 4 percent in March, climbed another 1 percent in April.
The 0.1 percent increase in the core rate of inflation in April was just half of what analysts had been expecting. Analysts viewed this as an encouraging sign that the jump in energy prices is not spilling over into other parts of the economy.
The 0.3 percent decline in retail sales followed gains of 0.5 percent in March and 2.1 percent in February.
Graphic: Consumer prices