Does Inflation Really Stand at Zero in US?

THE United States is close to price stability - really no inflation - and should remain there this year and next.

That's one prediction. It is made by Michael Keran, chief economist of the Prudential Insurance Company of America.

Another forecast, by Paul Kasriel, an economist with Northern Trust Company in Chicago, is that the inflation rate will edge up later this year to about a 4.75 percent annual rate from about 2.5 percent now. Many other economists anticipate some acceleration in inflation this year and next.

Few economists agree with Mr. Keran. One, Richard Hokenson of Donaldson, Lufkin & Jenrette, a New York investment house, writes: ``As for inflation, the reality is that the outlook on that front is the best that it has been in nearly 30 years.''

By raising interest rates this year, the Federal Reserve has shown some determination to keep the inflation outlook that way.

Keran's cheery prediction on inflation hangs partly on the statistics for the 12 months through April: Producer price inflation (PPI) dipped below zero to minus 0.32 percent. (The PPI numbers for May are released today.) Consumer price inflation (CPI) dropped below 2.5 percent, with the goods component rising only 1 percent and the services component a modest 3.5 percent. Average hourly earnings were up 2.7 percent.

To some degree, Keran says he accepts the argument that the inflation indexes overstate the real inflation rate. That's because the market basket used to measure inflation is out-of-date. The base year and index ``weights'' are for 1982-84 for the CPI and 1982 for the PPI.

``These weights may no longer reflect current spending patterns due to shifts to cheaper sources of supply,'' Keran maintains. Consumers, for example, are buying more than they did a decade ago in discount stores than in traditional department stores. There are also measurement problems concerning quality improvements, new products, and the tendency of consumers to substitute a less-expensive item for one that his risen in price. The inflation exaggeration may be as high as 2 percent, Keran notes. If so, the current inflation rate is actually far closer to zero than the official price data indicates.

Since 1991, core inflation - or the underlying inflation rate that has been filtered of transitory special factors such as a major drop in oil prices - has slowed to around 3 percent, notes a new study by economist John Carlson at the Federal Reserve Bank of Cleveland. That is down from about 5 percent in the previous three years. But that core rate hasn't continued to decline much. Fed policymakers, Mr. Carlson notes, can't depend on that rearview- mirror outlook for guidance on where inflation is headed.

Keran's optimism for inflation stems from his view that the economy still has excess industrial capacity, good prospects for productivity improvements, and stable growth in wage levels, despite falling unemployment. In the US, with its relatively weak union structure, faster inflation isn't kicked higher by large wage hikes pushing up costs; rather, it results from an excess demand for goods or higher import prices, Keran holds.

By contrast, Mr. Kasriel talks of rising industrial commodity prices, high levels of capacity utilization, lengthening delivery times for goods, and an increase in a price index kept by the nation's purchasing managers. Similar shifts in these indicators in the past have boded higher inflation, he says.

An economic pickup in Europe and much of the rest of the world -

with the exception of Japan - also means that it will be more difficult to fill in shortages with imports, Kasriel says.

Having raised interest rates to slow the economy, Federal Reserve Board Chairman Alan Greenspan sounds hopeful on inflation. At a meeting of commercial bankers in London this week, he was quoted by the Associated Press as saying: ``The numbers are clearly restrained.''

But bond market investors have been agreeing with most economists, in effect foreseeing more inflation by insisting on higher interest rates. They could be wrong. According to the Cleveland Fed's report, surveys of consumers and economists show they anticipated more inflation than occurred in the past few years.

The consensus forecast by economists says 2.8 percent for all of 1994 and 3.3 percent for 1995, up from 2.7 percent last year.

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