Inflation outlook calls for moderate increases into '86. July producer prices rose 0.3%, bolstering economic forecast
Washington — After years of raging like a tiger, inflation is now behaving like a sleeping lap cat. The change in behavior is producing major effects -- both positive and negative -- on individual lives and on the overall United States economy.
Monday the government reported that producer prices rose 0.3 percent in July after adjustment for seasonal factors. So far this year, prices at the producer level have risen at an annual rate of only 1.4 percent.
That slow rate of increase has been mirrored in relatively stable consumer prices, which have risen at close to a 4 percent pace for the last 31/2 years. Prices roared ahead at or near a double-digit pace from 1978 to '81.
Many economists expect the recent moderate pace of price increases to continue.
``We believe good inflation news will last well through 1985 and into 1986,'' says Donald Straszheim, president of Merrill Lynch Economics Inc.
Winners from subdued inflation include most savers, retirees on fixed incomes, investors in bonds and interest-sensitive stocks, and companies that are adept at boosting efficiency and cutting costs.
But ``in some areas [inflation] is low enough to be causing a lot of problems,'' notes Sandra Shaber, senior economist at Chase Econometrics, a forecasting firm.
Among the losers are individuals and companies that had counted on paying off heavy debts with cheaper inflated dollars. Also faring less well are investors who counted on inflation to boost the resale price of their gold, art objects, farmland, or homes.
The financial pressure on farmers is likely to grow even worse in the wake of the government's prediction Monday of a bumper corn and soybean harvest. With agricultural exports at a low ebb, the large crop is expected to add to bulging stocks, putting additional downward pressure on crop prices and farmland values. That land is the main collateral that troubled farm-area banks have on loans made to farmers.
Low inflation is being felt in the factory. With companies under pressure to cut costs and invest in more-efficient machinery, wage hikes have slowed. In major labor contracts settled last year, the first-year increase averaged 2.4 percent, well below the previous year's 4.0 percent boost in consumer prices.
For some individuals, lower inflation cuts two ways. Lower inflation rates have helped reduce interest rates. For those living on the interest from savings invested in short-term accounts, the decline in cash flow from sharply lower interest rates ``hurts more than any moderation in the cost of living'' helps, notes Harold C. Nathan, vice-president of Wells Fargo Bank. ``We wouldn't expect'' rates on savings accounts to keep falling at the same pace, he says.
The 50 economists surveyed by the newsletter Blue Chip Economic Indicators expect, on average, that inflation as measured by the gross national product deflator will be 3.9 percent in 1985 and 4.2 percent in 1986. Mr. Nathan says the inflation rate may even decline ``a bit'' in 1986 because of weak commodity prices, low wage-price inflation, and continued competition for US companies from imports.
A variety of factors have kept inflation under better control in recent years, economists say. These factors include:
A strong dollar, which has lowered the effective price of imported goods, putting pressure on US firms to keep prices down.
One factor in the dollar's strength has been the large size of the federal deficit. A large deficit tends to push up interest rates, thereby boosting demand for dollars among foreign citizens wishing to invest in the US.
In light of downward revisions in estimates of economic growth, the federal deficit over the next three fiscal years will be $41 billion higher than the recently passed congressional budget resolution indicated, according to the Congressional Budget Office. This figure assumes that Congress succeeds in making all the spending cuts it has promised.
Falling commodity prices, in which large farm harvests and weak demand for oil have played a key role.
Relatively high unemployment, which has kept downward pressure on wages and salaries. The economy's weakness over the last two quarters also has played a role.
Deregulation of various industries, which has boosted competition and helped hold down prices.
Forecasts of continued good news on the inflation front assume no major interruption in the supplies of key commodities such as oil and no rapid plunge in the dollar's value on foreign-exchange markets.
Low inflation still has long-run consequences. A 4 percent inflation rate in consumer prices halves the value of $1 in 17 years.