'Worse and worse' cycle of inflation is broken
Boston — Americans have become so pessimistic about the prospects for inflation that Leonard H. Lempert's good news may be a surprise.
Inflation, says Mr. Lempert, director of Statistical Indicator Associates, North Egremont, Mass., is coming down faster than average during the current recession. In fact, if the trend of the last two reported months was to continue until March, the ''rate of inflation'' would be running about 4.7 percent.
Moreover, this decline in the inflation rate is not merely a new recession-related phenomenon. Lempert states: ''. . . the long-term acceleration in the rate of inflation from cycle to cycle has been clearly interrupted.''
(The ''rate of inflation'' in this case is the annualized rate over six months, with the specific month at the midpoint of this half-year period. For instance, the rate of inflation for last July, when the current recession began, would cover the period from last April to October. This statistical method levels out the bumpy ups and downs of monthly figures and thus better represents trends.)
Over the last three business cycles, inflation got worse and worse. At the start of the April 1960-to-February 1961 recession, the rate of inflation was 1. 3 percent. At the next cyclical peak, December 1969, it had accelerated to 6 percent. It then notched up to 12.5 percent at the following peak in August 1974 , and to 15.3 percent in January 1980. But at last July's cyclical peak, it dropped to 10.3 percent. That ''rate of inflation'' has been dropping ever since , and according to Lempert's ''guesstimate'' was 5.2 percent for December. That assumes that the recent lower inflation rates continue for a few months.
Why has inflation's back been broken?
Monetarists would attribute it to the drop in the growth of the money supply since 1979. Lempert says it is because of the slow growth in the economy in the last few years. Businessmen are now having a tough time trying to boost prices. Employees thus are not getting such big wage increases.
Leif H. Olsen, chief economist for Citibank, points out that if the economy declines at a 2.5 percent annual rate this quarter - which seems possible - real economic output would be running at a rate only 0.3 percent above the first quarter of 1979.
Even if the economy picks up rather strongly later this year so that real growth from the current quarter to the first quarter of 1983 runs at 3.7 percent , then real output will have shown, for four years, a point-to-point increase of only 4 percent. That's less than 1 percent per year.
Another interesting feature of the recession is pointed out by Donald L. Koch , director of research at the Federal Reserve Bank of Atlanta. So far, he notes, the percentage of the unemployed that have been without a job for 15 weeks or longer is ''nowhere near as high'' as in the 1973-75 recession. This long-term unemployment, of course, is the most damaging to family finances.
As of December, the latest figures available, the share of the labor force unemployed over 15 weeks was 2.19 percent. It reached a peak of 3.15 percent in August 1975.
If ''discouraged workers'' - those who have become discouraged in their job hunting, are no longer actively seeking work, and thus are not listed among the unemployed - were to be added to the 15-week figure, the ''hardship rate'' would be running slightly over 3 percent. That remains below the 4.34 percent rate reached in the third quarter of 1975.
Though not denying that any unemployment is bad, Mr. Koch's point is that despite the 8.9 percent of the labor force unemployed in December, the amount of hardship is not yet severe. Many people have working spouses. Some 43 percent of women work today. Others among the unemployed have the ''safety net'' of unemployment insurance, food stamps, or other government benefits.
Koch admits that the ''hardship rate'' could increase in the weeks ahead before the recession ends and recovery begins. But he regards it as ''unlikely'' to reach the magnitude of 1975. In any case, he regards it as a necessary evil in the battle against inflation.
That ''evil'' could well get worse. Unemployment will likely increase further this winter. Mr. Lempert of Statistical Indicator Associates sees a good possibility of the unemployment rate's moving into the ''double-digit area'' if it follows the pattern of previous recessions.
Unfortunately, no nation has yet cut back inflation dramatically without paying a penalty in higher unemployment or price controls.