Inflation is retreating, but keep an eye on wage pressures, warn experts

After a prolonged battle, Americans have won an opportunity to finally put runaway -inflation behind them. The cost has been considerable - a wrenching recession, the deepest since the Great Depression, which has thrown millions of Americans out of work and forced thousands of businesses to close their doors.

Yet out of this ordeal, like a phoenix from the ashes, have come elements that promise to give the United States a period of sustained, noninflationary growth:

* The upward spiral of wage costs, which helped to spur inflation in the late 1970s, has significantly slowed.

* Productivity, which had been stagnant for several years, again is growing, as employers throughout the country rely on smaller work forces to produce more goods.

* So much slack exists in the economy, with factories on average operating at 70 percent capacity, that inflationary bottlenecks should not appear for some time.

Experts warn, however, that all this good news could be dissipated if Americans, through a kind of social compact, do not agree that inflation is an enemy to almost everyone.

Workers, for example, will be satisfied with moderate wage hikes only if their compensation stays ahead of inflation.

A wage boost of 5 percent produces a rise in the worker's standard of living if inflation is 3 or 4 percent. But the worker falls behind if his wage increase is eaten up by higher prices.

Moneyed people tend to benefit from inflation. They can afford to pay higher prices and they search out the higher interest rates that inflation brings.

They buy certificates of deposit, open Keogh and IRA accounts, invest in bonds - all of which produce, one way or the other, sparkling returns on their money.

Lower-income Americans demand protection in the only way they can - higher wages and fringe benefits in return for their work, including cost-of-living adjustment (COLA) clauses in their contracts.

This pushes up unit labor costs, or everything an employer must pay his workers - wages, benefits, COLA, and payroll taxes - to produce a good or service. Higher unit labor costs are tacked onto the prices that consumers pay.

The federal government, too, plays a role, by benefiting in some ways from inflation. The national debt is repaid with steadily cheapening dollars. Inflation pushes taxpayers into higher brackets, producing a windfall for the US Treasury.

All these factors contributed to the upward spiral of inflation in the period 1978 through 1981. During these four years the consumer price index averaged just under 11 percent, reaching a peak of 13.3 percent in 1979.

In 1982, as the recession deepened, inflation dropped radically to 3.9 percent. So far this year the rate is even lower, with congressional experts predicting a 3.5 percent rate for 1983.

Organized labor emerges from the recession weakened. Unions lost thousands of members in basic industries where work forces have been sharply pared in recent years - autos, steel, rubber, textiles, and others.

Four out of five American workers do not belong to unions, according to the latest figures issued by the US Department of Labor. Union membership is substantially down over the last decade.

Fear of job loss during the recession prompted many workers, union and nonunion alike, to forgo wage increases and in some cases to accept rollbacks.

As the economy strengthens and unemployment shrinks, a catch-up mood is likely to emerge as new wage contracts are negotiated. If compensation rises no more than productivity, inflation will not result. If, however - as happened during the 1970s - wages and benefits outstrip productivity gains, a fresh wage-price spiral may unfold.

''Over the longer run,'' says a report by the American Enterprise Institute, ''the rate of inflation tracks very closely the rate of increase in labor cost per unit of output. Accordingly, inflation will end when unit labor cost stops advancing.''

Meanwhile, an upward movement of interest rates, including those on mortgages , in recent weeks clouds the willingness of labor to moderate future bargaining demands. High interest rates hurt working-class Americans more than they do upper-income people.

A perception of fairness, experts agree - a sense that all Americans are sharing benefits and sacrifices - is essential, if the gains against inflation are to hold.

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