Inflation tops Carter agenda in election year

President Carter must have to grit his teeth as he tells Americans how deeply their economy is mired in recession and what this costs in jobs and budget deficits.

Gone is his dream of a balanced budget next year. Now, the White House concedes in its midyear economic review, the fiscal 1981 budget will be in the red by $30 billion.

Gone also is the President's hope that unemployment might be held to 7.2 percent of the labor force by the end of this year. Now 7.7 percent, the jobless rate may hit 8.5 percent by December, according to the White House report, and remain that high throughout 1981.

Already pressure is intense from Ronald Reagan and from both Republicans and Democrats in Congress for a tax cut to shake the economy back to life.

Not so, says Mr. carter. A tax cut might stimulate the economy, but it would also stir up the fires of inflation.

The Democratic leadership of Congress, under presidential pressure to forgo any tax legislation this year, is being told by Mr. Carter that a 1981 tax cut -- to be shaped well after the election -- is "quite likely."

The nation's prime problem, the President believes, remains inflation, now embedded in the economy at roughly a 10 percent rate. That is up from about 6.5 percent when Mr. Carter took office.

Though this sounds a lot better than the nearly 20 percent consumer price inflation of the first few months of 1980, much of that was a kind of padding, added by the "volatiles" of food, energy, and housing costs.

To lower-income Americans, spending the bulk of their income on necessities including food, fuel, and shelter, that 18 to 20 percent inflation rate was very real.

They may feel little relief from the fact that rapidly shrinking interest rates are pulling down both the cost of financing a mortgage and the consumer price index itself.

Indeed, says Charles L. Schultze, chairman of the Council of Economic Advisers (CEA), there may come a period when declining mortgage rates "will push the consumer price index below the underlying inflation rate."

It is that underlying, or bedrock, rate that troubles economic experts.

"There is a real danger," says Alfred E. Kahn, chief White House inflation fighter, "that people will not recognize that the underlying inflation rate is rising."

A premature tax cut, in the White House view, might reignite public expectations of inflation, send interest rates up again, and ultimately translate some of the resulting inflation into higher labor costs.

A similar view is expressed by the 24-nation organization for economic cooperation and development (oecd), which says 'underlying inflation' and the need to increase productivity lie at the core of the west's economic problems.

The midyear White House report, transmitted to Congress July 21, foresees the recession hitting bottom by the end of this year, with a slow climb toward recovery in 1981.

Because each 1 percent increase in the unemployment rate costs the budget about $20 billion, according to Mr. Schultze, both the current 1980 budget and next year's will sport large deficits.

The shortfall this year now is estimated at $61 billion, second highest in the nation's history. Some experts believe next year's deficit may end up higher than the $30 billion forecast by the White House.

Inflation, as measured by the consumer price index, says the White House, may run 12 percent this year, and just under 10 percent in 1981.

The current recession, the report says, has delt a twin blow to earlier White House assessments, by shrinking tax receipts and ballooning outlays, including unemployment compensation.