Some predict new surge in US inflation. Money supply climb causes concern, but most economists see stable rate
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3. World commodity prices, including oil, were weak in the second half of last year, perhaps again partly because of US monetary restraint.Skip to next paragraph
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Now, however, these factors are reversing and, thus, inflationary pressures are rising once more. The monetarist economists note that money growth is rapid, the dollar has weakened, and commodity prices are starting to rise again.
Indeed, Kudlow sees renewed inflation as ``the biggest threat to economic expansion.'' Peter Crawford, another economist at Citibank, agrees, saying: ``Much higher inflation would absorb a large fraction of each dollar of added spending, thereby repressing real growth, and inflation probably would drive the monetary authorities to severely restrictive policies.''
Top Treasury officials, it is understood, expect inflation to remain steady or, at worst, creep up slowly. They are more concerned about the possibility of a slowdown in the economy -- which could result in more unemployment, higher budget deficits, and harm to world economic recovery.
Contrariwise, Kudlow and Citibank economists have pointed out that in the past, inflation has sometimes surged suddenly ahead within a few months. They fear this could happen again. And they expect the economy to bounce back solidly from its poor performance in the first quarter, when gross national product rose at only a 1.3 percent annual rate, but the ``implicit price deflator'' -- the broadest measure of inflation -- rose at a 5.3 percent annual rate.
They already see some signs of inflationary pressure:
In March, the consumer price index rose at a 5.8 percent annual rate (but up only 3.7 percent for the 12 months to March).
Prices of services have increased 5.1 percent over the past 12 months. Kudlow sees a pattern of acceleration in this sector, which accounts for 48 percent of the consumer price index (CPI).
Excluding food and energy, the CPI has risen 5.1 percent over the past year.
The steep decline in energy prices, according to Kudlow, has run its course.
Unit labor costs in the business sector rose at a 7.8 percent rate in the first quarter, and even in manufacturing alone at a 5.1 percent annual rate. Citibank's Mr. Murray does not expect these costs to rise at such a rapid rate this year as the economy picks up steam and productivity rises again rather than falling (down 1.2 percent in that first quarter). Nonetheless, he says, that inflationary factor ``puts us on notice.''
In February a group of 14 prominent economists, former politicians, and former secretaries of the Treasury, calling themselves the Committee to Fight Inflation, saw a serious danger that inflation might accelerate again. The bipartisan group, headed by Henry H. Fowler, a former Treasury secretary, and Herbert Stein, a former chairman of the Council of Economic Advisers, warned against a stimulative monetary policy, more protectionism, and doing nothing about the budget deficit.
Most economists, though, do not expect inflation to surge. Typically, Allen Sinai, of Shearson Lehman Brothers, says, ``There is little to fear on inflation over the next few months.'' After that, because of a weaker dollar, he expects a ``more permanent, though still modest, acceleration of inflation.''