Inflation Holds Steady, Retail Sales Slow

WASHINGTON —  Americans received a double dose of good news on the inflation front Tuesday: The government reported that consumer prices remained unchanged in March, and there were signs that the economy may no longer be in danger of overheating.

The Labor Department’s monthly consumer price index was flat last month after edging up 0.1% in February and holding steady in January. During the first three months of the year, the combined rise in consumer prices has held to an annualized rate of 0.2%.

Meanwhile, the Commerce Department reported that retail sales edged down 0.1% in March, reflecting dampened demand for a wide range of products, from autos and building materials to furniture.

The new figures came as a relief to the financial markets, which have been fearful that the Federal Reserve Board, wary that inflation could rebound, would raise interest rates to help slow the economy. Stock prices rose after the price index report was released.

Bruce Steinberg, chief economist at Merrill Lynch & Co., said the reports show “an utter absence of inflation,” and he predicted a significant slowdown--both in consumer spending and overall economic growth--in the April-June quarter.

The halt in consumer prices came partly as a result of another sharp drop in energy prices, which have been plummeting as a result of falling worldwide demand. Energy prices plunged 1.3% in March, with gasoline prices falling 3.5%. Grocery prices dipped 0.1% in March.

The Labor Department also said its so-called core rate of inflation--which excludes often-volatile food and energy prices--edged up only 0.1% in March, following increases of 0.3% in February and 0.2% in January.

There were moderate increases, for example, in the prices of medical services and recreation, which rose 0.3% and 0.4%, respectively. And airline fares shot up a sharp 2% in March to a level 4.5% above that of a year ago.

In a separate calculation, the department said consumer prices in Southern California, including Los Angeles, Orange and Riverside counties, rose 0.2% in March, following a 0.1% increase in February. Indexes for individual cities vary widely.

Economists have been surprised that inflation has remained so low this far into the 7-year-old economic recovery. Traditionally, as the economy grows more rapidly and the unemployment rate ultimately declines, inflation pressures intensify.

The unemployment rate currently stands at 4.7% of the work force--well below the 5%-to-5.5% level that most mainstream economists say is the lowest it can go without reviving inflationary pressures--and it has been in that benchmark range for more than a year.

Analysts have offered a variety of theories to explain the current good fortune on the inflation front, from recent increases in productivity--or output per hour of work--to advances in technology and competition from foreign imports.

Nevertheless, forecasters said the economy is still a long way from a period of widespread “deflation,” which some doomsayers fear might push the world into a major recession. For that to happen, a general decline in wages and prices would have to occur.

The slight falloff in retail sales for March was the latest of several recent signs that the economy might be slowing. The government reported earlier this month that factory orders fell 0.9% in February. And job growth declined slightly in March.

Economists have been predicting that the U.S. economy would slow somewhat as a result of the Asian financial crisis, but so far the effect has been more modest than expected.