Zero Inflation in US Is Really Deflation

ROBERT EGGERT'S latest survey of 50 top economic forecasters points to continued slow growth and modest inflation ahead in the United States.

Real national output this year will increase 2.6 percent from 1992, and 1994 gross domestic product (GDP) will rise 2.7 percent, according to the consensus compiled by Blue Chip Economic Indicators, Sedona, Ariz. That's one-tenth of a percentage point higher for 1993 from the August survey, largely because of an upward revision in GDP data late last month. And it's down one-tenth of a point for 1994. Economists are concerned about the psychological and economic impact of the Clinton tax and spending changes and the business doldrums in Europe and Japan, explains Mr. Eggert, editor of the publication.

This consensus forecast squares with the view of Robert Forrestal, president, Federal Reserve Bank of Atlanta. He expects GDP to grow a real 2.5 percent this year and inflation, measured by the consumer price index, to increase 3 percent. The Blue Chip inflation forecast is 3.1 percent.

``This is not an ebullient forecast, but a positive one,'' Mr. Forrestal notes in a telephone interview. Forrestal is regarded as one of the ``doves'' on the Federal Open Market Committee (FOMC), the body of seven Federal Reserve governors and 12 regional bank presidents which sets the nation's monetary policy. He wasn't among those FOMC members sounding the alarm bells last spring when there was a short-lived burst of higher inflation. That's when the FOMC decided on a ``bias'' for higher interest rates to stamp out an acceleration in inflation, should it occur.

Price stability and low inflation are the ``primary goal'' of the Fed, Forrestal says. No central banker could say less.

With both economic output and inflation lower this summer than most economists predicted, interest rates have declined, not risen. Forrestal's dovish position was more accurate from a forecasting standpoint. His position also reflects his concern about the social cost of an attempt to move rapidly to zero inflation and a suspicion that the CPI exaggerates real inflation.

Forrestal sees no legal impediment to the Fed seeking zero inflation by boosting interest rates and slowing growth. But he does say that the central bank must be cognizant of the concerns of the public over stagnant incomes and high unemployment. ``These considerations have to be taken into account,'' he says.

Because of measurement problems, the current inflation rate is actually not far from price stability, Forrestal says. The CPI represents a ``basket of goods'' of more than 360 categories of products and services purchased by consumers. Each category, whether food, cars, or housing, is given a fixed weight according to its share of consumer expenditures at a certain ``base period.'' But as prices change, consumers will shift purchases from more expensive to less costly substitutes. These shifts aren't measured continuously. The weights are adjusted only after many years. In the interim, the price index may overstate inflation.

Further, government statisticians, in their efforts to capture improvements in quality in the CPI, may overstate inflation, Forrestal says.

Because of such technical difficulties, zero inflation would really mean deflation, he says. And deflation does not meet the Fed's goal of price stability. Maybe 1 or 2 percent CPI inflation would be ``real price stability.''

Forrestal doesn't place much trust in the money supply as a monetary tool for controlling the economy. He says the connection between M2, a broad measure of money, and the real economy has ``been severely dissipated if not cut.'' However, the relationship could return, he says.

But to some economists with a ``monetarist'' bent, the relatively slow expansion of M2 is a factor in the slow-growth economy. Northern Trust Company's Paul Kasriel says that although it takes less money to support a given level of economic activity than in the past, a speedup or a slowdown in M2 growth is reflected in more economic growth or less growth in about three or four months. So a boost in M2 growth last spring should mean moderately faster economic activity this fall, he says. Mr. Kasriel used this technique to correctly forecast trends of last year and this year, often differing from the consensus view.

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