WASHINGTON -- With so much attention being paid to the sputtering economy and the presidential campaign, investors have been ignoring the good news on inflation.
Price pressures have been ebbing since the summer across a wide front of consumer goods and services. "Probably the most overlooked phenomenon in the U.S. financial markets has been the substantial diminution in inflationary pressures that has taken place in recent months," analysts at Dean Witter Reynolds Inc. told clients in a market letter last month.
It could be that several years of slow economic growth under President Bush and a stingy money policy on the part of the Federal Reserve are finally starting to relieve price pressures that have been embedded in the economy for a long time.
Analysts at Dean Witter calculate that in the last four months, the Labor Department's consumer price index has gone up at an annual rate of only 2.4%, a sizable improvement from the 3.1% recorded in 1991 and even better compared to 6.1% in 1990.
A 2.4% rate of inflation, if it holds, would mark the best performance on the price front since the early 1960s. The one exception is 1986, when the price index rose a scant 1.1% due to a collapse in world oil prices that sent gasoline prices down to 75 cents a gallon.
Six out of the seven major categories of goods and services tracked by the government in the price index are showing improvement.
For example, food prices have gone up at an annual rate of only 1.2%, even with the damage done to crops in Florida by Hurricane Andrew and bad weather conditions that curtailed fruit and vegetable production in California and elsewhere. Prices for meats, poultry, fish, eggs, oil, and alcoholic beverages are lower.
Or take housing, which includes maintenance and other costs in addition to mortgage or rent payments paid by home owners. The housing component makes up 41% of the total consumer price index and has gone up only 2.1%. Improvements in maintenance, furnishings, and housekeeping supplies have all helped keep own costs in this area.
Clothing prices have been flat since May, reflecting the widespread cost-cutting by retailers and the large number of stores that have proliferated in malls and now find themselves competing for the business of tight-fisted consumers.
Even medical care, where costs in past years have consistently risen at double-digit rates, is showing signs of improvement. The 5.4% rise it showed in the last four months is its lowest rate in years, reflecting a slowdown in costs of medical supplies.
"I don't know whether we've driven inflation completely out of the household decision-making process or the corporate decision-making process, but we're as close to that as we've been in literally decades, in my opinion," said William Sullivan, director of money market research at Dean Witter.
Federal Reserve figures show that consumers have been paying down their total debt -- automobile credit card, and other types of credit -- for six straight months. This is the opposite of what happened in the 1970s and 1980s, when people saw an advantage to taking on more debt that could be paid back in cheaper dollars because of inflation.
Some of this big debt paydown undoubtedly reflects sluggish growth in income and employment. Still, there seems to a new ethic that associates a cost with carrying debt, and that is evidence that the inflation ethic is going out of style.
In the new price environment, consumers seem to be taking a tougher attitude. "Consumers sense that they don't have to pay up for anything, and they're
demanding lower prices in a lot of areas," V
says Mr. Sullivan. "That's an important change in the inflation mentality. That's what we've achieved in 1992, and I think that's very significant."
The bottom line for investors is that yields of medium and long-term bonds are still attractive and can more lower as inflationary fears fade. Eventually, the bond market will reflect greater confidence in the price environment.