A Nation of Bargain-Hunting Consumers Takes Pressure Off Fed to Hike

With inflation on the brink of zero, virtually nobody expects the Federal Reserve to raise interest rates when its monetary policy committee meets Tuesday in Washington.

"There is simply no pressure in the inflation pipeline," said Bruce Steinberg, chief economist at Merrill Lynch & Co., referring to the producer price and consumer price indexes released last week.

July consumer prices were up 0.2% in July from June and 2.2% from a year earlier. Producer prices, which are a gauge of wholesale activity, fell 0.1% in July, the seventh straight monthly decline.

Mr. Steinberg expects inflation to remain stable during the next year and does not rule out further disinflation. "Under those circumstances, the Fed will be on hold and bond yields should head lower," he said.

Some economists think changed consumer buying habits-exemplified by the hot-and-cold pattern of retail sales over the past several years-are a major factor behind the mild inflation environment.

In short, Americans have become a nation of stingy shoppers bent on finding bargains.

"We got recovery in retail sales basically because there has been very heavy price cutting, said Lacy H. Hunt, economist and partner at Hoisington Management, Austin, Tex.

"When the merchandise and product are offered at full price at the beginning of the selling season, the consumer resists and it doesn't move," he said. "It has happened with spring and summer merchandise, as well as Christmas-related items."

"This year summer merchandise didn't move during May and June, but now we are seeing more sales at distressed prices in July and August," he said.

Automobile sales are the prime example, he said. "People have learned not to pay full price, and that drives down inflation." Mr. Hunt thinks this is part of a general "throttling down" by consumers at the late stage of the business cycle.

Economist Jonathan Basile of HSBC Markets Inc., New York, noted that new car and truck prices "have been a large contributor to the core CPI's benign performance so far this year." Used car prices and auto finance charges "have also pushed the trend in the core rate lower," he added.

The core CPI-which excludes volatile food and energy costs-was at a 31- year low in July. But auto-related costs, which have recently fallen, account for roughly 10% of the core index. Mr. Basile noted that new car and truck prices were down 0.4% through the first nine months of the 1997 model year. Meanwhile, used car prices are down by 3.6%, and auto finance charges are down by 3.2%.

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