THE better price statistics for May that came out this week and last were no real surprise to economists.
"We could not see how a combination of slow growth and small wage increases could result in a pickup in the fundamental rate of inflation," says Edward Campbell, chief economist at Brown Brothers Harriman & Co., a New York investment bank.
For the first four months of this year, consumer prices rose at an annual rate of 4.3 percent, well ahead of the 2.9-percent rate in the same months last year. Gold prices also moved up from about $327 an ounce in early March to approximately $382 by mid-May - a trend often seen as indicating more inflation.
Some officials at the Federal Reserve Board got excited, leaking reports that the central bank's policymaking Open Market Committee had, in its instructions to chairman Alan Greenspan, called for a bias toward higher short-term interest rates. That prompted the bond and stock markets to have a short fit. Prices fell sharply. And the White House, after a meeting between President Clinton and Mr. Greenspan June 9, issued a statement saying, "there are no inflationary pressures on the economy" that would wa rrant an increase in interest rates.
"The administration reacted in a measured way," Paul Kasriel, an economist with Northern Trust Company, Chicago, says approvingly.
A keen Fed watcher, Mr. Kasriel says that a majority of Fed policymakers do not want to raise interest rates but have biased the policy directive to placate a couple of inflation "hawks" on the Fed Board of Governors, Wayne Angell and Lawrence Lindsey. He adds: "The Fed used a bit of open-mouth policy rather than open-market policy to signal the markets it was concerned about inflation."
Dr. Campbell says something similar: The Fed was "positioning itself" so it couldn't be criticized if the May inflation numbers continued at a high annual rate.
The May numbers eased inflation fears. Many economists are patting themselves on the back about their foresight. Campbell had forecast a 0.1-percent increase in the consumer price index (CPI). That's what the actual statistics showed.
The consensus forecast by some 50 economists compiled by Blue Chip Economic Indicators has the CPI rising 3.2 percent this year and 3.4 percent in 1994, up a bit from 2.9 percent in 1992.
Economists see several indicators of modest inflation. One is the tremulous recovery. The Fed reported Wednesday that output at the nation's factories, mines, and utilities rose only 0.2 percent in May. Factories at industrial concerns were operating at 81.6 percent of capacity, well under the 85-percent level that many economists say might cause production bottlenecks and more inflation. Housing starts were up 2.4 percent in May to the highest level in five months, a mildly disappointing increase to som e economists. Automobiles sales showed greater strength.
Other signs of low inflation include declining commodity prices and falling wages when adjusted for inflation. The National Association of Purchasing Managers, in its latest survey of members, found that relatively few manufacturers are reporting persistently higher prices.
As for the gold price increase, Kasriel holds that it was just an anomaly, perhaps related to demand for gold in China where inflation is running at about 17 percent annually.
Gary Bigg, an economist with Prudential Economics, maintains that both the producer price index and the consumer price index overstate inflation. This is because both are based on prices of a fixed basket of goods, one established in 1982 for the PPI, and one in 1982-84 for the CPI. Buyers, he says, shift purchases away from goods and services that go up sharply in price and toward cheaper items. So the basket is by now outdated.
A better measure of prices, says Karen Moeller, another Prudential economist, is the personal consumption expenditures deflator, a broader measure of inflation used in compiling the gross domestic product statistics. It comes out only quarterly, and has been showing inflation running about 3 percent.
What economists call the "core" inflation rate (the nonfood, non-energy items in the CPI) was trimmed roughly 2 percent to 3.4 percent in 1992 by the two years of slow growth in 1991-92. Inflation isn't an easy enemy to beat.