The best kept secret
If public opinion polls are to be believed, the best kept economic secret in the United States today may well be the sharp drop in the inflation rate. Just consider the remarkable difference between statistical fact and public perception. Thanks to a broad range of factors - such as belt-tightening by the Federal Reserve Board, budget austerity by the Reagan administration, wage restraint at the bargaining table, and, of course, the recession -- the US inflation rate has been reduced sharply from the intolerable double-digit rates that prevailed in 1979 and 1980.
For the past year the rate has been running at 6.6 percent, compared to 13.3 percent in 1979. What is curious in all this is that public belief runs counter to the statistics. According to a recent New York Times/CBS News Poll, for example, 70 percent of those persons interviewed did not perceive any such decline. In fact, 34 percent felt that the inflation rate today was growing faster than a year ago. Another 36 percent saw no change in the rate. Other national polls report similar findings.
What goes on here?
For millions of Americans the recession is hitting particularly hard, hence the drop in prices has not really helped bring about an increase in purchasing power. The reasonable explanation is that with wages so far growing only modestly, per capita personal income has stayed basically flat.
What is of deeper importance, however, is that the marked difference between fact and perception about inflation has long-range political and economic ramifications.
Whether the Reagan administration deserves all the credit or not, the fall in inflation has certainly been its main economic achievement to date. Lowering inflation, after all, had been one of the President's priorities when he took office. Yet, if the public believes otherwise -- namely, that inflation has not come down or is higher than before -- Republican candidates will likely profit little from the better inflation statistics in the November elections. So, in this sense, the administration has done an inadequate job in putting its story across to the public.
The need to get the word out on inflation, however, stems from far more important considerations than just benefiting any one political party. Rather, very real public policy considerations are involved, all relating to the issue of expectancy - and social conduct based on expectancy. If the general public believes that the inflation rate either has not fallen or is rising, then, according to many economists, they tend to act on that belief.
This means that wage demands tend to be somewhat higher, and labor negotiations more intense; that businessmen tend to increase prices where they can in anticipation of more inflation; that purchasing decisions tend to be based on fears about future price hikes. But the result, in all such cases, is to make less money available for capital expenditures or productive enterprises or, for that matter, the purchase of consumer goods. This means less growth for the economy and the possibility of higher inflation down the road -- or, at the least, the shoring up of current inflation patterns.
During the past year the US has proven that inflation can be reduced without having to resort to the type of cumbersome wage and price controls that proved so disruptive in the early 1970s -- and that France is now instituting. The Reagan administration -- which prides itself on its communicative abilities -- needs to do a far better job in getting out the true facts on the battle against inflation.