Global inflation: is there a cure?

All around the world inflation is slowly coming down, but the rejoicing - at least among economists - is muted by caution.

Doubts persist about the permanence of the gains, because to this point the trend toward lower prices springs largely from factors that are volatile and subject to change.

''An important part of the decline in inflation, in the United States and elsewhere,'' says C. Fred Bergsten, director of the Institute for International Economics, ''derives from the substantial reductions in energy and food prices.''

The cost of oil appears to have stabilized in the $30- to $34-a-barrel range and may, relative to inflation, sink a bit in real terms. Yet the Organization of Petroleum Exporting Countries could slash production enough to tighten the market, or world demand for oil might grow briskly when industrial nations regain their economic health.

As for the volatility of food prices, hungry peoples cannot count on uninterrupted good harvests among the great grain-growing nations of the world. Global grain stocks are thin, compared with the risks posed by growing populations and the possibility of intermittent bad weather ahead.

At least the drop in food and energy prices is on the positive side. Not so with another major contributor to lower inflation - the combination of recession and high unemployment that grips much of the industrial world.

When people lose their jobs - or fear that they might - they snap their pocketbooks shut, except for purchases they really need. To move goods from clogged shelves, merchants drop prices and reduce factory orders.

Recession, in short, is the classic and painful remedy for wringing inflation out of an economy. The trouble is, in recent years it has not worked.

True, inflation grew more slowly during some periods of recession. But for a variety of reasons prices tended to resume their upward climb when economic turnarounds came.

Governments pumped up public spending to combat unemployment, wage demands outpaced productivity gains, and a pent-up demand for goods and services fueled fresh inflation.

Adding greatly to the problem during the 1970s was the tenfold jump in oil prices, from $3.01 a barrel at the beginning of 1973 to $34 at the end of 1981.

The cumulative effect of all this was to strand the world, after each recession, on a higher platform of underlying inflation, from which new price hikes took off.

Gradually the industrial nations became mired in ''stagflation'' - a combination of high inflation, slow economic growth, and high unemployment, characterized by a rapid ricocheting between growth and slump.

For poor lands of the third world, the outlook was even darker. Sales of their commodities to industrial nations fell off, or prices for them dropped, at the same time that developing nations had to import increasingly expensive oil.

''Half of these countries,'' says J. de Larosiere, managing director of the International Monetary Fund, ''now face current (balance of payments) deficits of at least 13 percent of GNP - more than three times their level of a decade ago.''

Unlike rich nations of the North - the United States, Canada, European lands, and Japan - less-developed countries (LDC) have few manufactures with which to pay for, or somewhat offset, their deficits. The result is an increasingly top-heavy burden of LDC debt owed to foreign banks and governments.

For North and South alike, the problem is to learn how to achieve steady, sustained economic growth without reigniting inflation. First, how much progress has been made?

Taking the consumer price index as a measure, the US inflation rate stood at 13.3 percent in 1979, dropped to 12.4 percent in 1980, and fell to 8.9 percent last year. Inflation at the wholesale level declined more sharply, standing at 7 percent in 1981.

Inflation also fell, on average, among the 24 industrial powers grouped in the Organization for Economic Cooperation and Development (OECD). Consumer prices among members rose 10.6 percent in 1981, compared with nearly 13 percent the year before.

The US stands roughly midway on the OECD inflation scale, faring much worse than West Germany (5.9 percent in 1981) and Japan (4.9 percent), but doing better than France, Britain, Italy, and Canada.

Much of the 1981 gain, according to OECD officials, came from lower inflation rates for energy and food, with the cost of oil leading the way - the same volatiles that helped the United States.

Then, in the somewhat stiff language of economists, the OECD adds another reason for the decline in inflation: ''an easing in unit labor costs in industry.''

Simply put, this means that recession is putting people on the street and forcing workers who still have jobs to moderate their wage and benefit demands.

Ten million people are unemployed among the 10 nations of the European Community and the number of jobless continues to rise - an experience roughly paralleling that current in the United States.

Here we get to the heart of doubts about the durability of the gains against inflation. Wages and salaries make up two-thirds of the entire gross national product (GNP) of the US and other industrial lands.

If wages and benefits, including cost-of-living adjustments, rise faster than productivity - the total of goods or services turned out by a worker in a given period of time - the result is inflation.

Prices for volatiles like food, energy, and other commodities may fluctuate or fall, but if the basic wage level - or unit cost of labor - continues to outstrip productivity, a nation's underlying inflation rate will climb. That has been the case in recent years, especially in the US, where growth in productivity has plummeted.

During the 1960s, says Federal Reserve Board chairman Paul A. Volcker, a kind of euphoria was built into major US wage contracts - an expectation that everyone's standard of living would rise by 3 percent yearly.

This was sustainable, he says, as long as productivity was growing at 3 percent. In the 1970s productivity began to shrink but expectations did not.

Contracts continued to reflect a 3 percent real gain in living standards - or the expectation thereof - long after the economy could not deliver on the promise.

''With declining productivity and higher oil prices,'' said Mr. Volcker at a time when oil costs were still climbing, ''there is no way you can give everyone a higher standard of living on average. It means a declining living standard.''

In some US industries, notably autos and steel, wages and benefits soared far above the average manufacturing wage in the United States. They were padded by generous cost-of-living allowances and the 3 percent ''real'' hike.

For the economy as a whole, the result was to push up the underlying inflation rate - that part of inflation that persists, even when volatile costs go down. Underlying inflation at the beginning of 1982 was reckoned at about 9 percent, a bit higher than the consumer price index itself.

''If we are lucky,'' says Brookings Institution economist Charles L. Schultze , ''we may come out of the recession with an inflation floor of 7 to 7.5 percent , instead of the present 9 percent. Especially,'' he added, ''if moderate wage contracts in some of the very important industries in deep trouble radiate out to other wage contracts.''

''Wages rising at 10 percent or more a year are not consistent with bringing down inflation,'' says Paul Volcker.

''In the private nonfinancial sector,'' writes the Finan-cial Digest of Manufacturers Hanover Trust Company, ''while productivity grew at an annual rate of 0.3 percent per annum during the three years ending in 1980, compensation per hour jumped by 9.3 percent and total compensation advanced by 12 percent per year.

''As a result, these wage gains translated into an annual average increase of 9 percent in unit labor costs. This was one of the reasons why many of our products were priced out of the market. It also contributed to the sharp rise in the rate of inflation.''

So far this year it appears that unions and management - grappling with job loss, competition from overseas, high interest rates, and declining sales - are moving away from the traditional attitude of confrontation toward cooperation.

The recently ratified contract between Ford and the United Automobile Workers is the most publicized example, but trucking, meatpacking, rubber, and airlines are other industries in which both sides have compromised.

Central to these new agreements are company pledges to move toward job security for workers, in return for union acceptance of wage and benefit freezes or, in some cases, rollbacks.

The bottom line of such arrangements is lower unit labor costs - i.e., less cost that needs to be passed through to consumers in the price of the finished article or service.

A study done for the Conference Board, a major US business organization, estimates that first-year wage settlements may average 8 percent in 1982, compared with 11.5 percent two years ago.

Various parts of the world, of course, have different mixes of inflationary pressures and economic woes with which to contend:

* In Western Europe, the postwar baby boom - which came five years later than it did in the US - is pouring more young people onto the labor market than European economies can readily absorb.

* Developing countries urgently need to diversify and upgrade their manufactured exports, if they are to have any hope of controlling burgeoning foreign debts.

* In the US, a pronounced shift from manufacturing to service industries puts a premium on worker skills. The use of robots and other advanced technology on assembly lines adds to this emphasis.

Asked about future prospects for American workers, UAW vice-president Donald Ephlin replied: ''For the unskilled, prospects are very poor. In guild (skilled) areas, very good.''

Experts applaud the downward drift of oil, food, and other commodity prices. But, for lasting gains against inflation, they focus on something else - unit labor costs and productivity, or what it costs to put a quality product in the customer's hands.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items