Higher prices arrive, but how bad are they? CPI increases 0.7%, pushes markets to dramatic sell-off

Charles Ferris has felt the pinch of inflation - and it hurts.<br><br>The Oklahoma City retiree said prescription drug costs and rising property taxes are starting to cut into his fixed income. He finds

Monday, April 17th 2000, 12:00 am

By: News On 6

Charles Ferris has felt the pinch of inflation - and it hurts.

The Oklahoma City retiree said prescription drug costs and rising property taxes are starting to cut into his fixed income. He finds it worrisome that official government reports now confirm what he sees at the pharmacy.

"The price of medicine keeps going up and up," said Mr. Ferris, 77, who was visiting Dallas on Friday with his wife, Dolly. "We can't keep up with it."

Mr. Ferris, a retired engineer, said the couple recently went to Mexico, where they were able to pick up about $300 in medicines for $37.

He is concerned that rising prices will stretch their $42,000 annual income.

Mr. Ferris is experiencing firsthand the trends that surfaced Friday in the Labor Department's monthly Consumer Price Index.

Higher costs, which were first limited to energy products, are now showing up in retail stores, restaurants and pharmacies.

The government report showed that prices surged 0.7 percent in March, the largest increase in a year.

The news sparked fears that the nation's lengthy economic boom was over, resulting in a dramatic sell-off by investors in the stock market and record point drops in both the blue chip Dow Jones industrial average and the tech-laden Nasdaq composite index.

Higher prices were recorded for transportation, medical care and housing.

And the pace appears to be picking up: For the first three months of this year, prices have risen at a 5.8 percent annual rate, more than double the 2.7 percent increase for all of 1999.

"You have to say there are troubling signs," said Greg Valliere, managing director of the Schwab Washington Research Group.

Mr. Valliere and other analysts said the higher inflation numbers likely mean still higher interest rates. They said Federal Reserve Board Chairman Alan Greenspan and fellow policy-makers would probably raise short-term interest rates another quarter percentage point when they meet May 16.

Some economists question whether there is an inflation threat. But the Fed has raised interest rates five times since June, trying to slow down runaway growth before it causes a damaging burst of rising prices.

"We are beginning to see that higher energy costs are spreading throughout the economy," said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis.

So far, the Fed's attempts to cool the economy have not appeared to work. During the final three months of 1999, growth rocketed 7.3 percent, the biggest gain in 15 years.

Analysts believe that the economy continued to expand well above the 3.5 percent to 3.75 percent annual rate desired by the Fed. Just last month, employers hired a whopping 416,000 new workers. And shoppers have not ended their buying spree.

The Commerce Department reported Thursday that retail sales rose 0.4 percent in March, reflecting strong demand at apparel stores, restaurants and drugstores. Analysts said strong demand for workers would eventually push up wages, costs that businesses eventually have to pass on to consumers.

Consuelo Rodriguez already has raised prices at Paletas Frutitas, a frozen dessert vendor on Jefferson Boulevard in Oak Cliff.

"We have been having a heck of a time getting people to sell our Popsicles in the streets," she said. "Most of them want to go on to something else because they can make more money and we can only pay on commission."

Higher commission payments are not the only problem. Prices for the 14 percent fat milk and sugar needed to make the frozen treats, known as paletas, also are rising.

In recent months, Ms. Rodriguez raised the retail cost of the paletas to $1 from 80 cents.

"We had to, because otherwise we would go out of business," she said. In recent months, the overall inflation rate has increased as energy costs have spiked.

But the most recent report showed that the core inflation measure, which excludes food and energy, also started to rise.

The Labor Department's Bureau of Labor Statistics said the core inflation rate climbed 0.4 percent, the biggest increase in five years. For the first three months of this year, the core rate was 3.2 percent, significantly above the 1.9 percent recorded for all of 1999.

Some analysts say more bad news is in the pipeline.

"We should be expecting more inflation numbers like these," Mr. Sohn said. "The best news on inflation is probably behind us."

Not everyone thinks inflation is spreading. Stan Shipley, an economist with Merrill Lynch & Co. of New York, said labor costs are not rising sufficiently to send prices out of control.

"This looks to us like a one-time event," Mr. Shipley said of the March inflation figures.

Becky Birmingham, a 49-year-old North Dallas resident, agrees with Mr. Shipley's assessment.

"I really have not seen much of a price increase on anything except gasoline," said Mrs. Birmingham, as she took a break from shopping at the Galleria. "That is why I am not worried. This is not like in the mid-1970s."

Mr. Shipley said the stock market sell-off may help cool the economy. When combined with higher interest rates and the inflation report, he said, consumers might become less confident and curtail their spending in the second half of this year.

"You have created a lot of uncertainty in people's minds with the stock market," he said. "And with higher mortgage rates, people may say this is not the best time to stretch myself by buying a bigger house."