Has '70s Scourge Been Whipped?

INFLATION COWED

Twenty years ago, it bedeviled consumers from Los Angeles to Berlin. Today it seems as passe as leisure suits or pet rocks.

Disco elevator music? No - inflation.

Decades after running rampant throughout the West, inflation remains largely absent from rich nation economies. At around 2.2 percent, the average inflation rate for top industrial nations is now the lowest it has been in a generation.

In fact, some prominent economists are claiming that inflation is virtually extinct. Structural change has made the business climate of the 1990s much more resistant to wage and price increases, they say. If true, such a shift could have important implications for economic policymakers everywhere. Central bankers might be able to ease up on their monetary brakes, pushing economic growth higher without igniting an inflationary spiral.

But many experts remain unconvinced that inflation is locked up for good. Its demise has been predicted before, they say. Yet it always seems to reappear, often when it's least expected.

"Things are going on which produce lower inflation at the moment," says economist George Perry at the Brookings Institution. "That's a long way from saying it's a part of history."

1970s surge

Such caution may be understandable when the experience of the 1970s is taken into account. Inflation surged throughout the decade, playing havoc with interest rates, bond markets, purchasing power, and consumer decisions.

Consider these numbers: From 1970 to '75, Japan's inflation rate averaged 11.4 percent. The comparable figure for Great Britain was 13 percent, and for the United States, 6.7 percent. By 1980, prices were rising at a 13.5 percent annual rate in the US, and 18 percent in Great Britain.

That's when then-Federal Reserve Board chairman Paul Volcker and some western counterparts redoubled anti-inflation efforts. He restrained dramatically the creation of new money that could feed inflation. One result was a recession that rippled around the world and cooled prices.

Now an inflation-fighting mindset is ingrained in economic policymakers around the world. Current Fed chairman Alan Greenspan has followed Mr. Volcker's lead and is quick to tighten money whenever inflation threatens to reappear. For this and other economic reasons the US Consumer Price Index is now running at a 2.9 percent annual rate, according to the latest available government data. Japan, which has had problems with deflation, now has a 12-month CPI growth rate of 0.1. In Britain, annual inflation is running at 2.7 percent, and in Germany it's 1.7 percent.

Recent jumps in grain and oil prices have put markets on edge and led some experts to expect inflation to gain momentum. So far that hasn't happened. Wage gains - a major force driving inflation - remain low.

"We still don't see definitive reports of higher inflation," the Fed reported in its "beige book" survey of regional economies earlier this month.

Economist Lester Thurow of the Massachusetts Institute of Technology (MIT) in Cambridge, Mass., thinks relatively high inflation is gone. In his latest book, "The Future of Capitalism," he claims that the factors that powered inflation in the '70s have disappeared and that economies today are much more inflation-proof than in the past.

For one thing, he argues, property values collapsed around the world in the mid-1980s and are unlikely to rise quickly any time soon. For another, the increased globalization of national economies means the state of the world employment market, not just that of the US or Japan or Britain, influences a country's wage rates. And unemployment is high, globally speaking - making raises difficult to get.

Furthermore, Mr. Thurow says, new information technologies are helping fuel global productivity growth. Since they're getting more production per employee, on average, companies face less pressure to raise prices if they want to keep revenue up. For these and other reasons "the world is essentially back to the conditions of the 1960s, with much less inflationary-prone economies," Thurow writes.

Nor is he the only prominent expert to hold such beliefs. The chief economist of Britain's HSBC banking group, Roger Bootle, recently published a book titled "The Death of Inflation." Some corporate chieftains think slow economic growth is a larger problem than the distant prospect of rising prices. Rather than guarding against any reignition of inflation, goes this view, central bankers should ease tight-money policies and lower interest rates.

The 'old bear' sleeps

But many economists scoff at rhetoric that holds inflation dead. Some claim that the old bear has already reawakened. We'll see evidence of that this summer, they say, if the United Auto Workers push for, and win, wage boosts in their contract talks with carmakers.

Whatever the future holds, the US ought to take advantage of the current low-inflation climate to put in print that it wants to keep things that way. "We should give the Fed a mandate to contain inflation between 0 and 3 percent," says MIT professor Rudy Dornbusch.

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