An Oct. 20 Business article incorrectly identified the source of the consumer price index. The Department of Labor compiles the index. Published 10/30/1999)

Consumer inflation rose 0.4 percent in September, the steepest rise in five months, but in line with the expectations of economists. Analysts attributed the hike to one-time or temporary increases in the prices of food, gasoline, clothing and tobacco, and said yesterday's Commerce Department report was no sign that inflation is heating up.

"There's no inflation in the U.S.," said Bruce Steinberg, chief economist for Merrill Lynch & Co. "We have some temporary things that boosted the CPI [consumer price index] this month; energy prices are up but won't be next month. . . . There was a big increase in apparel prices, but that will go back to a decline next month."

Jittery financial markets breathed a sigh of relief on the news, with the Dow Jones industrial average surging nearly 220 points in midday trading before falling back to close up 88.65 points, at 10,204.93. The Standard & Poor's 500-stock index, which many mutual funds use as a benchmark, rose 7.19, to 1261.32. The technology-heavy Nasdaq composite, meanwhile, fell 0.97, to 2688.18

Investors were also heartened by another report showing construction of new homes and apartments fell by 3.2 percent in September, the second monthly decline and a bigger drop than economists expected. While some analysts said the decline reflected rising mortgage rates, others suggested it may have been in part because of Hurricane Floyd.

The market's behavior was a reversal of last week, when the Dow tumbled Friday after another government report showed inflation rising a sharp 1.1 percent in September at the producer level.

Economists said that number, too, overstated price trends because it was driven upward by unusual jumps in prices of oil and tobacco, among other things.

Still, market watchers cautioned the stock market remains volatile. Investors have been on guard for any sign of rising inflation, concerned that Federal Reserve policymakers, who have already raised interest rates twice this year, will move to raise rates again when they meet next month. The Fed held rates steady at its October meeting, but announced that it was leaning toward raising rates.

"I believe we're still under the weight of Federal Reserve uncertainty," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., who said inflationary fears are overblown. The increasing use of the Internet, which has bred new competition and kept prices for many goods in check, will keep a lid on inflation, he said.

Economists were divided about whether yesterday's consumer price report made another rate hike more or less unlikely, but they stressed that if the Fed does raise rates, it will be less because of rising inflation and more out of fear the booming economy is still too hot and that tight labor markets might lead to future inflationary pressures.

"Although the CPI numbers may be high enough to give the Fed cover to move, they don't indicate an inflationary trend," said Bill Cheney, chief economist for John Hancock.

"We still think the Fed will tighten in November," said Mark Vitner, vice president and economist with First Union Capital Markets Group, in Charlotte. "Their motivation, however, is curbing excess demand growth, not a sudden outburst of inflation, which we now know does not yet exist."

Along with the Fed, analysts have been watching for signs that the U.S. economy might finally be cooling down.

The housing report yesterday may be one. The decline pushed housing construction down to a seasonally adjusted annual rate of 1.62 million units. Although the housing sector remains generally healthy, a sharp decline in building permits in September could be a sign that the sector will slow further in coming months.

Economists say many businesses have been unable to regain the pricing power they lost during the Asian economic crisis, when prices fell broadly.

A major exception to that rule is energy prices, which are helping exaggerate overall inflation. Driven by increased consumer demand from a recovering global economy and a move by the Organization of Petroleum Exporting Countries to limit production, oil prices have soared this year.

The price of gasoline is up 28 percent this year, providing a significant bump for the CPI. But underlying crude oil prices have already begun to fall back, and the end of the summer driving season is expected to bring a falloff in gasoline prices.

Overall, consumer inflation has risen at a 2.8 percent annual rate year to date, according to the Commerce Department, a sharp increase from 1.6 percent rate of increase posted for all of last year.

But the core inflation rate, which excludes volatile food and energy prices, is up only 2.0 percent over last year, just a tick above the 33-year low of 1.9 percent reached last year.

Jim Glassman, chief economist for Chase Securities Inc., said that even that official core number is misleadingly high. His own calculations showed that after adjusting overall consumer inflation by backing out hikes in energy and in tobacco--whose prices have been driven up by costly legal settlements--a more accurate measurement shows the core rate up only about 1.5 percent over last year.

"The picture is more favorable than it appears," Glassman said. "Underlying inflation has actually declined."