Inflation Rate Is Under Control

INFLATION may be the great bogyman of the United States Federal Reserve Board. But the growing consensus among most economists is that - barring the unexpected - there's just not going to be all that much of it around during the next year."All the evidence suggests that inflation is just not a major problem, although it's still obviously higher than the Fed would like," notes David Wyss, an economist with DRI/McGraw-Hill, an economic consulting firm based in Lexington, Mass. According to a broad range of economists polled by Blue Chip Economic Indicators, a newsletter based in Sedona, Ariz., consumer prices will rise just under 4 percent during the next four quarters. Federal Reserve Board chairman Alan Greenspan told Congress recently that he expects inflation to be about 3.5 percent in 1991. That's down from 6.1 percent in 1990. Indeed, the federal government's latest statistics, out last week, showed that consumer prices rose a modest 0.2 percent in June over May. Inflation is now running at an annualized rate of 2.7 percent for 1991. DRI/McGraw-Hill also finds its projections spinning gradually downward. DRI sees core inflation (excluding food and energy prices) now running at about 4.5 percent; but that is expected to fall to 4 percent or under. Mr. Wyss believes that overall consumer inflation will show a sharp drop for this calendar year down to the 3 percent level. Compare that to the double-digit rates of the late 1970s, when energy costs were roaring into the stratosphere. Wyss sees several factors conspiring to keep inflation relatively low: Productivity is increasing, as normally happens when a nation comes out of a recession. Wage settlements have been coming in lower than in recent years, due to a slack labor market following work force cuts at many companies. Commodity prices, with the exception of agricultural goods, have been "going through the floor." Add all that up, and core inflation - the basic element of the overall inflation rate - is under better control tha n in recent years. Lower inflation also stems in part from lackluster retail sales, which give retailers little ability to boost prices. Thus, retail sales declined sharply in June, offsetting big jumps in May, notes Kidder, Peabody & Co. Sales were weak in apparel stores and general department stores. And warm weather on the East Coast has apparently induced many consumers to defer spending until later in the summer - the back-to-school buying period. The relatively low inflation rate provides some slack for the Fed, if it eventually chooses to boost the nation's money supply to increase economic growth. The Fed's target growth range for the best-known measure of money supply (M-2), is 2.5 percent to 6.5 percent. Martin Feldstein, who was chairman of the Council of Economic Advisors under President Reagan, would prefer that money supply grow at an 8 percent range, to increase economic growth. And President Bush wants higher economic growth. But the Fe d, determined to wring inflation out of the US economy, is not inclined to open the money gates at this time. M-2 grew at an annual rate of about 3 percent during the 12-month period ending this June; that is about half the growth rate for the same period ending in June 1990. The Fed, for now, has decided to adhere to a policy of watching and waiting - not boosting the money supply, but not lowering current targets. Still, Wyss believes that the Fed, for all its talk about "zero-inflation," will take whatever steps are necessary to ensure that the current modest recovery stays on course. A steady low inflation rate would be a stabilizing force for stock and bond markets, preventing frequent gyrations. Companies that have reduced payrolls and have cash on hand would benefit. Companies with high debt levels would be hurt, as would those with high payroll costs - where labor settlements were reached during periods of rising wage scales.

You've read  of  free articles. Subscribe to continue.
QR Code to Inflation Rate Is Under Control
Read this article in
QR Code to Subscription page
Start your subscription today