CONSUMER PRICES UP ONLY 2.5% IN 1995.

Byline: Christopher Drew The New York Times

Signaling that inflation has been vanquished to a degree not seen since the early 1960s, the Labor Department reported Thursday that consumer prices rose only 2.5 percent for all of 1995, the lowest rate in nearly a decade and the fifth consecutive year that inflation held to about 3 percent or less.

Most economists toasted the news, saying that they expected the inflation rate to remain just as low in 1996 or to dip further. They said that this period of price stability, one of the longest since World War II, would give the Federal Reserve enough room to keep cutting interest rates, as it did Wednesday, to spark a slowing economy.

For cautious Fed governors, the latest inflation figure was "certainly music to their ears," said David Orr, an economist at the First Union Corporation in Charlotte, N.C.

But a few other economists warned that wage increases and other pressures could start to rekindle inflation this year, should the Fed continue to lower interest rates.

"The day that the central bank declares victory over inflation is the day that the forces of reinflation commence," said Steven S. Roach, senior economist at Morgan Stanley.

Still, government figures show clearly that inflation has not been so tame for so long since the administration of John F. Kennedy and into the early years of Lyndon B. Johnson's presidency, when it averaged 1.3 percent from 1961 through 1965.

Moreover, there are no wars or economic shocks on the horizon like the oil-supply cutbacks of the 1970s. Even health costs, a nemesis to inflation fighters in the 1980s and early 1990s, rose in 1995 at just 3.9 percent, the slowest rate in 23 years, the report showed.

The overall inflation rate of 2.5 percent last year followed 2.7 percent in both 1994 and 1993, 2.9 percent in 1992 and 3.1 percent in 1991.

It was also the lowest overall rate since the 1.1 percent recorded when oil prices plunged in 1986, the only other year since the mid-1960s in which inflation fell to less than 3 percent.

Given that many economists believe that the government's index of consumer prices tends to overstate true inflation by anywhere from half a percentage point to a whole point, "essentially no inflation is showing up now," said Allen Sinai, chief global economist at Lehman Brothers.

Sinai noted that consumer prices rose only 0.2 percent in December despite a temporary jump in energy prices. He also said it was remarkable that the overall rate could be so low nearly five years into a period of expansion, which, in economists' terms, began in March 1991.

Sinai said he thought that the inflation rate would remain at 2.5 percent this year, or even to dip a bit lower. If that is the case, he said, the Federal Reserve should have enough maneuvering room to trim short-term interest rates by perhaps another half a percentage point in the next several months.

Led by the Fed's chairman, Alan Greenspan, the Federal Open Market Committee - made up of the Federal Reserve Board's five governors and some of its regional bank presidents - lowered the federal funds rate, the rate that banks charge each other for overnight loans, by a quarter-point Wednesday, to 5.25 percent.

CAPTION(S):

CHART

Chart (Color) Consumer prices Knight-Ridder Tribune Graphics Network