Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, April 13, 1991 TAG: 9104130168
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE: DANIEL HOWES BUSINESS WRITER
DATELINE: LENGTH: Medium
But some Western Virginia analysts called for cautious optimism, saying lower prices are the customary result of depressed consumer demand during a recession.
"This is the way it's supposed to happen," said Alan Gayle, chief economist for Crestar Bank in Richmond. "These are the kind of numbers you should see during a recession when people get thrown out of work and stop spending."
Analysts predicted that a slight dip in the Labor Department's Consumer Price Index, coupled with signs that the recession is holding on, would soon prompt further interest rate cuts by the Federal Reserve Board.
However, hopes that interest rate relief would come Friday were dashed when the central bank drained reserves from the banking system, a move interpreted by many economists as a clear signal that the Fed is not yet ready to push rates lower.
"What we should see is the Fed following this up in a week or two with a ease in the discount [interest] rate" it charges to commercial banks, Gayle said.
"The central bank's monetary policy is the only tool the government has available to get the country out of the recession," said Allen Sinai, chief economist of the Boston Co. in New York. "I think the Fed will do whatever is necessary to give us a revival."
Analysts said they were looking for a reduction in the discount rate and a cut in the federal funds rate, the interest that banks charge each other for overnight loans. Such a strong move would be enough to push down banks' benchmark prime lending rate and various other consumer and business rates lower, they predicted.
Still, economists suggested Friday that the price dip was predictable. "While the war was on, people sat home and watched TV . . . so there was a shrink in aggregate demand," said Catherine Eckel, associate professor of economics at Virginia Tech. "And demand makes prices go up."
Richard Sorensen, dean of Virginia Tech's R.B. Pamplin College of Business, agreed. "It's not unusual for this to occur in the later stages of a recession or economic reversal," he said. "There is excess capacity in our economy because people aren't buying as much."
The 0.1 percent drop in the Consumer Price Index was the first outright decline since a 0.4 percent fall in April 1986. Much of the decline was attributed to a 5 percent drop in energy prices, which have now retreated 18 percent from their November peak.
Even more important to jittery financial markets was the fact that the so-called core rate of inflation, excluding the volatile energy and food sectors, was up only 0.1 percent in March following gains of 0.8 in January and 0.7 percent in February.
Consumer inflation rose at an annual rate of just 2.4 percent in the first three months of this year. That represented the best showing for consumer prices since a 2.2 percent annual rate of increase in the July-September quarter of 1986, another period when falling energy prices contributed to lower inflation.
For March, gasoline pump prices dropped 4.9 percent, home heating oil costs fell 6.8 percent and natural gas prices declined 1.2 percent. Some economists, noting that world oil prices have begun to firm, said March may be the last month of steep declines in energy costs.
The Associated Press contributed to this report.
by CNB