WASHINGTON - Inflation remains tame and shows no signs of threatening the bond market by moving higher in the near future, analysts said yesterday.
Most analysts are sticking to their predictions that the yearend spurt in economic growth will prove short-lived and that the expansion will revert to the subdued pace seen over the last two and a half years. That should mean only mild pressures, and perhaps a slight improvement in inflation as 1994 unfolds.
The view that inflation may still be improving was reinforced by Tuesday's report from the Labor Department that the producer price index in October fell 0.2%. The report surprised market participants and showed that prices compared to a year earlier were essentially unchanged.
Yesterday's reading of a 0.4% increase in the consumer price index for October was not as attractive to bond market participants as the more reassuring September report showing no gain in prices. But it was not viewed as an ugly duckling, either.
William McDonough, president of the Federal Reserve Bank of New York, told reporters that the two price reports "taken together indicate inflation is stable to lower."
Part of the October increase in the CPI reflected the 4.3 cent-per-gallon increase in federal excise taxes that took effect Oct. 1 under President Clinton's deficit reduction program. Analysts also cited a run-up in fruit and vegetable prices as a result of lingering effects from the drought in the Southeast and the Midwestern floods. Excluding food and energy, consumer prices were up 2.4% in the last three months, and 3% in the last year.
Compared to a year earlier, total consumer prices where up 2.8%, slightly under the 2.9% rise recorded for all of 1992.
Given the latest price measures, Federal Reserve officials are expected to remain neutral on interest rates when they meet Tuesday to review monetary policy.
"There is some fear embodied in bond prices of higher inflation, but it's generally a stable and low-inflation picture that the markets are giving the Fed," said Peter Greenbaum, an economist with Smith Barney Shearson.
"We don't see the Fed moving aggressively to counter upward pressures on prices or perceived upward pressure on prices, and they'll jaw the market if the market starts to get worried," Greenbaum said. "But the numbers we saw this morning should quell a lot of those inflationary fears."
Other analysis said bond market worries about an acceleration in growth remain misplaced because defense cutbacks, the recession in Japan and Europe, high debt loads, and other factors continue to restrain consumers and business.
"The inflation backdrop is highly favorable on a structural basis," said John Williams, managing director of Bankers Trust Co. The market has been roiled on some days by investor worries about an aging business cycle that could push up inflationary pressures, while at other times "longerterm thinking takes hold" that focuses on the structural forces that continue to impede growth, he said.
"We may have a little upward pressure on rates for a short time, but ultimately the economy will prove to be growing only at a slow to moderate pace, which will not generate any inflationary pressures," Williams said. He estimates that U.S. gross domestic product will rise by about 2.5% next year, about the same increase he expects this year.
"I think we're going to have about 3% inflation and perhaps a bit less as far as the eye can see," Williams said.
Robert Giordano, chief economist for Goldman, Sachs & Co., said, "Even before the numbers came out, the outlook for inflation remaining low was quite good through next year, barring shocks of any type." The economy, he said, has enough "excess capacity to absorb growth without having to worry about bottlenecks or shortages and wage pressures."
Giordano estimates that consumer prices will rise about 2.75% this year and by roughly the same percentage next year. The Fed, he said, is not likely to begin tightening credit before the second half of next year.
In remarks last week to reporters, Clinton said he would not be surprised to see a small rise in interest rates as the economy strengthens. But he said he does not expect rates to go up much because inflation is not heating up.
Administration officials have said they are counting on low rates to offset the drag on the economy from the tight federal budget. "If the bond market blew out, they'd be dead meat," said Giordano, but that worry appears remote because the economy is enjoying a mild expansion that does not appear to be in jeopardy.