Fed Leaves Interest Rates Unchanged New Report Shows Few Signs Of An Increase In Inflation

U.S. inflation news just gets better, as one key government measure shows consumer prices are rising at the slowest rate in 32 years.

Taking note of this positive news, Federal Reserve policy-makers voted Tuesday to leave the overnight bank lending rate unchanged at 5.50 percent. It was the sixth straight time the Federal Open Market Committee decided against raising U.S. borrowing costs.

The overall consumer price index rose a smaller-than-expected 0.1 percent in November, half the rate of October’s 0.2 percent increase, Labor Department figures show. That held inflation to a 1.8 percent annual pace in the first 11 months of the year, its lowest level since oil prices plunged in 1986. When food and energy costs are excluded, consumer prices are rising at a 2.1 percent rate this year - the slowest pace since 1965, before President Lyndon Johnson began the escalation of the Vietnam War that sent U.S. prices soaring.

“This is one of the most satisfying environments the U.S. economy has had since the end of World War II,” with strong industrial production and job growth, low unemployment and almost nonexistent inflation, said William Sullivan, an economist at Dean Witter Securities in New York. “I hate to say this is nirvana, but it’s very close.”

Separately Tuesday, Commerce Department figures show that construction starts by U.S. builders unexpectedly rose 0.8 percent in November - matching October’s percentage increase - to an annual rate of 1.531 million. The gain pushed starts of new houses to their highest level since February.

Falling gasoline, airfare and entertainment costs last month offset higher medical, housing and food costs, Labor Department figures showed.

“Inflation has never been so low so far into an expansion,” according to Merrill Lynch economists Bruce Steinberg and Cheryl Katz. “Both goods and services prices are decelerating.”

Analysts had expected a 0.2 percent increase in both the November CPI and core rate. In October, the CPI and core rate both increased 0.2 percent.

Competition and consolidation, the advent of money-saving technology and cheap imports are restraining prices. That’s an important reason Fed policy-makers may consider an interest-rate cut in the new year.

In a separate report Tuesday, the Labor Department said workers’ average weekly earnings adjusted for inflation rose 1.4 percent in November, after rising 0.2 percent in October.

That’s the largest gain since February, and pushed up earnings 3.1 percent for the 12 months ended in November. For all of 1996, earnings rose 2.1 percent.

Industrial costs remain contained, though. Energy prices, which account for less than a tenth of the CPI index, fell 0.2 percent in November, as gasoline prices plunged. Food prices rose 0.2 percent last month.

Housing and medical care costs both rose 0.3 percent, while clothing and upkeep costs rose 0.2 percent.