Pulling the plug on prices: good news for the inflation-weary
They said it couldn't be done: Prices are actually falling.Skip to next paragraph
Subscribe Today to the Monitor
Consumers are smiling, and it's no wonder. For the first time in 17 years, their dollars actually increased in value as the consumer price index (CPI) recorded a 0.3 percent drop in March. This compares with a 0.2 percent increase in the CPI in February. Inflation for the January-February-March quarter is only 1 percent at an annual rate.
While the latest inflation news -- an annual rate for March of minus 3.3 percent -- looks good for the public, the economy as a whole it provides at best a mixed picture:
* Social security. Payments include cost-of-living adjustments tied to the CPI's performance for the year ending with the first quarter. As a result, social security recipients will be getting an average extra $27 a month as of July 1. For 1981, with higher inflation, the cost-of-living increase averaged 11 .2 percent or $37 a month. (The reduction saves the Treasury $300 million for fiscal year 1982.)
* Consumers. Prices dropped dramatically in several keys areas: gasoline, down 4 percent; food and beverage prices, down 0.3 percent; housing prices, off 0.4 percent; mortgage rates, down 1.3 percent. This increase in real purchasing power could help fuel the economic recovery that many economists expect to begin during the second half of this year.
* Federal budget. Here the picture is cloudy. Uncle Sam assumed a higher rate of inflation for social security cost-of-living increases than he got. So the Treasury will save $300 million in outlays during fiscal 1982. That is expect to balloon to a savings of more than $1 billion a year between 1983 and 1987. But experts also say such a dramatic drop in prices means less revenue for the government. Inflation-fueled ''bracket creep,'' which pushes taxpayers into higher tax brackets, slows. When prices fall, as they did in March, bracket creep slows to a crawl. In either case, governments at nearly all levels find themselves with less income than they'd planned on.
* Interest rates. Normally, the significant gains the White House has made against inflation would be a signal to the Federal Reserve Board that it can loosen its grip on the nation's money supply. Indeed, President Reagan during his five-minute radio speech Saturday said that ''interest rates shouldn't be higher than 10 percent.'' But Federal Reserve Board chairman Paul A. Volker appears to be maintaining his position that the size of the federal deficit, not the Fed itself, is the key to lower interest rates.
Beyond these broad areas, the major drop in inflation may signal an end to ''stagflation'' -- simultanteous high inflation and high unemployment. To be sure, unemployment remains a thorn in the administration's side.
Economists noted that unemployment has soared to 9 percent, and that high interest rates are straining the economy. Three-month Treasury bills are paying 13.3 percent interest and banks' prime rates (to best customers) 16.5 percent. People aren't buying homes in some cases because mortgages are so high, and workers threatened with job-loss are reducing spending. Manufacturing industries are operating at 70 percent of capacity.
Some economists see in the current situation the traditional corrective force of unemployment checking inflation.
But critics of President Reagan's policy charge that the administration planned it that way. White House spokesmen assert on the contrary that the recession was left over from the Carter administration and that Reagan policies are now beginning to bring recovery.
Overhanging the economy is the huge federal deficit and the threat of more red ink from arms increases. White House-congressional stalemate over the budget has dominated economic news here for a month: Only in the United States is the legislature able to raise the budget over the executive's desire without the corrective threat of a vote of ''no confidence'' and a national election.
It is generally agreed that the White House expected a big Wall Street advance when the supply-side tax cuts were enacted by Congress last year. The boom didn't last. Stocks reached 1,024 in May 1981 but declined to as low as 813 on the Dow Jones industrial index last February. More recently the market has staged a recovery, ending the week of April 18 at 862.18.
As to the current impasse -- ''the budget problem is created by the enormity of the defense buildup and the unwillingness to pay for it,'' Otto Eckstein, Harvard economist, told Congress last month. He sees cyclical forces promoting a recovery cycle that won't be permanent, however, unless the deficit is cut.
The Brookings Institution now warns that unless the White House and Congress get their budget acts together, there could be a ''worst case'' deficit of $230 billion by fiscal year 1985.