Is US inflation licked? It depends on pickup at home - and abroad

Many aspects of the current US economic expansion are a puzzlement. None perhaps more than questioning how long today's relative price stability will continue. Moreover, the questions come from both sides. Will the credit demands of an aging recovery and a still huge federal deficit combine to bring back inflation? Or will worldwide recovery be relatively weak, bringing on an era of deflation?

During July the consumer price index rose by 0.3 percent, slightly more than the 0.2 percent increase of June. We're getting accustomed to hearing these picayune figures. As recently as 1980, the inflation rate for the year was 12.4 percent.

In the year since last July, prices have risen about 4 percent. They are currently rising at 3.5 percent yearly rate, in spite of the hefty business expansion under way for a year and a half. If the perception grows that inflation has really been licked, the bond market would have a field day. Yields well above 12 percent are far higher than the return an investor traditionally requires from such a safe investment. Yet the fact that yields are at that level indicates there are a lot of folks out there who are still unconvinced about inflation.

One factor keeping the US inflation rate low has been the overvalued dollar. This has had an effect in at least two ways. First, relatively cheap imported goods have been strong competition for domestically produced goods and have acted as a brake on domestic price increases. This is at least suggested in a breakdown of the July numbers. The consumer price index for services, which by their nature are domestically provided, rose 0.7 percent. The price of commodities was unchanged. By the time a business expansion is as mature as this one, the cost of goods in the CPI might be expected to be rising. At the very least, the pressure from imports seems to be helping.

The second way the high US dollar is helping to keep prices down is less direct. The dollar is held up largely by high interest rates. The flow of investment money into the United States and the pull of high interest here is retarding growth overseas. This, in turn, explains why world-traded commodities such as oil have not been going up in price. The rest of the world is only at the start of its new business cycle.

On the other hand, there are those who see the world going into a period of deflation - of actual price declines. One can point to the weakness of commodity prices over the past year. A further drop in oil prices would intensify this line of thinking.

J. Paul Horne, who surveys European economies for Smith Barney, Harris Upham out of Paris, addresses this concern over worldwide deflation in a report. He notes that one reason some fear a deflationary cycle is concern in Europe that the US economy will ''slow sharply'' sometime in 1985. If this doesn't occur, there is less chance of deflation setting in.

Mr. Horne also notes that most major countries, with the notable exception of the US, ''have had restrictive fiscal policies since 1981-82.'' In the threat of deflation, they now have more leeway to ease up in both fiscal and monetary policy. He concludes, ''It appears to us that the outlook is strong enough not to warrant fears of deflation. More likely, we believe, is continued disinflation in Europe and Japan, combined with modest economic growth.''

Because of weaker overseas economies, it seems unlikely that there will soon be an overall demand for world-traded commodities that would bring back inflation. At the moment, it even appears that a stronger Europe in 1985 would counterbalance a US growth rate somewhat slower than 1983 or '84. Nevertheless, it's worth noting that the US inflation rate has been kept down partly by weakness overseas, and that kind of ''help'' is not what one would want to depend on for his own well-being.

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